Does Having a Credit Card Help My Credit?

Although Americans tend to have a problem with overspending on credit cards, you generally need one to build a good credit score. You must use the credit card responsibly and only for emergencies when using cash is not feasible. If you want to maximize the benefit of a credit card on your credit history, you should use credit cards based on the factors in the Fair Isaac Corporation, or FICO, scoring formula.

Identification

You need at least one active credit card because your mix of credit accounts for 15 percent of your FICO credit rating -- the most used credit rating system among lenders. Repaying credit card debt usually boosts your credit rating faster than installment debt, such as a mortgage or auto loan. This is because credit cards have fewer restrictions and nothing to secure the line of credit, so they are a better indicator of your willingness to repay debt.

Considerations

You want a few credit cards, but do not open as many as you can. Also, account for your spending habits. If you do not have a credit card because you frequently miss payments or max out your line of credit, owning a credit card may be too risky. Missed payments stay on your credit history for seven years and can take 100 points off of your FICO rating. Also, maxing out a credit card can do more than 45 points in damage, according to Ellen Cannon of Bankrate.com.

Using a Credit Card

To boost your credit, your creditor must have something to report to the national credit reporting agencies. If you want to open a credit card just to raise your credit rating, you can put a small charge on it each month, like a cable bill, and pay it off immediately. At the very least, use the card every six to 12 months or else the credit bureaus will consider it an inactive account.

Tips

Most consumers receive the maximum amount of points when they have two credit cards for every installment loan. For example, if you have a mortgage and student loan on your report, you should have four credit cards -- ideally from a national bank and not a retail or department store. Aim for a balance of less than 10 percent of your limit, because the FICO equation starts to ding you when your balance exceeds 10 to 35 percent of your credit limit. Expect the credit card to damage your credit rating in the short-term. Applying for a credit card lowers your score by as many as 5 points and new accounts lower the average age of your loans and lines of credit.