You might have considered getting a new credit card to use only for emergency situations but wondered about the potential impact it could have on your credit.
Opening a new credit card to use only for emergencies could actually be good for your credit.
Credit utilization — essentially how much debt you are carrying versus how much credit has been extended to you — is a major component of your credit score. To achieve high marks in this category, the general rule of thumb is to keep your utilization below 10 to 30 percent of your collective credit.
Having a card you don’t use regularly can help you stay below this marker because the card’s credit limit will lower your overall balance-to-limit ratio. The lower this ratio is, the better your score will be.
Consider the potential drawbacks
Of course, this theoretical boost is predicated on whether you avoid running up a big bill, so there are a few caveats to consider before you apply for a particular card.
For starters, as a best practice, consumers generally want to pay off all their monthly credit card charges in full. Doing so precludes you from having to pay interest on the purchases. It also prevents your credit utilization from climbing too high and having a negative effect on your score.
Having said that, there’s nothing innately wrong with keeping a credit card around as an emergency source of short-term liquidity. You just want to make sure its terms and conditions align with this strategy.
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Card features to look for
Shop around for a card with a reasonable credit limit so you aren’t inclined, even in an emergency, to charge way beyond your means.
Similarly, avoid cards with high interest rates or usage fees because you won’t be using the payment method enough to reap any ancillary benefits, such as rewards, purchase protection and extended warranties, that these types of charges fund.
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Keep a close eye on your card
If you do open a new credit card, make sure to monitor the account for fraudulent activity.
Finally, should an emergency thankfully not materialize, you’ll still want to use the card every now and then. Issuers have been known to close accounts because of inactivity, which could inadvertently skew that credit utilization rate discussed earlier and hurt your credit score.
Consider breaking out the card to make a small purchase each billing cycle, or even use it to pay a recurring charge, such as a gym membership, for best results.
Just make sure to pay this small bill off each month. A first missed payment can cause your score to drop anywhere from 70 to 90 points, depending on where it stood at the time of the delinquency.
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