Category: Credit Score

Why Credit Cards Matter After a Financial Setback

If you’ve gone through a tough financial time, the idea of opening a credit card might feel risky or even wrong. But when it comes to rebuilding your credit score, credit cards are one of the most effective tools you have, if you use them wisely.

Here’s why they matter:

• They help you establish or re-establish revolving credit
• They show lenders you can borrow and repay responsibly
• They improve your credit utilization ratio (as long as balances stay low)
• They create a consistent record of on-time payments

In the world of credit-scoring, new behavior carries more weight than old mistakes. Credit scoring models pay close attention to your most recent activity, especially the last 24 months. That means it’s entirely possible to rebuild your credit score within 12 to 24 months, even after a major financial meltdown.

But it doesn’t happen automatically. You need to take intentional steps, and one of the most important is opening new credit cards and managing them the right way.

Want a clear roadmap for rebuilding your credit fast? Get free access to the 7 Steps to a 720 Credit Score course, and learn how to use credit cards, installment accounts, and proven strategies to hit your score goals in as little as a year.

Enroll Here

Rebuilding isn’t about forgetting your past. It’s about showing the credit bureaus, and yourself, that you’ve turned a corner.

The Sparrow Rewards Mastercard: One Option Among Many

The Sparrow Rewards Mastercard is designed for people with fair or poor credit who want to rebuild. It offers a few standout features:

• 1% cashback on all purchases when paid on time
• Monthly reporting to all three credit bureaus
• Virtual card access upon approval
• Credit limit increases over time with responsible use

Sounds promising, right? It can be. But there are trade-offs:

• APR is 29.74% for purchases and 31.74% for cash advances
• Annual fee is $59 the first year, then $99 (billed monthly at $8.25)
• No known autopay feature, making it harder to avoid late payments
• Mixed reviews about declined purchases and customer service

If you choose to apply, it’s important to be realistic about the costs and whether you’ll be able to stay on top of manual payments. Used properly, it can help—but only if it fits into a larger credit strategy.

The Sparrow Rewards Mastercard is just one of many credit cards designed for people with fair to poor credit. Before applying, look at our handpicked list of the best credit cards for rebuilding credit—including options with no annual fees, easier approval odds, and better customer experiences.

Compare Credit Cards

What to Look For (and Avoid) in a Credit Card When Rebuilding Your Credit Score

Credit cards usage is a key factor in how your credit score is calculated. The more responsible activity the credit bureaus can see on accounts that are actively being used and paid on time, the faster your score improves.

A lot of people want to wipe their hands of credit after a financial meltdown, but this is a losing strategy. Why? The credit-scoring bureaus need evidence that you can manage debt wisely. If they only have your older, negative patterns, they won’t ever give you a high credit score.

Remember this: No credit is just as bad as poor credit. When it comes to credit cards, three is the magic number. With three credit cards, you can:

• Maximize your available credit (which improves your utilization ratio)
• Show consistent on-time payments across multiple accounts
• Build a strong credit profile with more depth and reliability

This shows the credit scoring models that you can manage multiple lines of credit without falling behind. That pattern of responsible behavior, repeated month after month, is what drives meaningful score growth.

Here’s what you should look for in a credit card:

• Reports to all three bureaus
• Reasonable annual fees (or none)
• Tools that make payments easy (like autopay)
• Credit limit increase opportunities
• Low interest rate (though you will avoid paying interest if you pay your bills on time and in full)

Here’s what you should avoid:

• Cards with unclear terms or hidden fees
• High APRs that could trap you in debt if you carry a balance
• Cards that don’t report to all three bureaus
• Cards with no upgrade path or no rewards at all
• Poor customer service or tech issues that interfere with payment reliability

The Sparrow Rewards Mastercard checks some of these boxes, but not all.

Secured Cards and Authorized User Accounts: Two More Ways to Build Credit

If you’re not ready (or able) to get approved for a traditional credit card like the Sparrow Rewards Card, there are two powerful alternatives that can still help you rebuild your credit: Secured credit cards and authorized user accounts.

A secured credit card works just like a regular credit card, except you put down a deposit that acts as your credit limit. For example, you might deposit $200 and then have a $200 credit line. Because you’re putting up the deposit, secured cards are much easier to qualify for, even after bankruptcy or a financial meltdown. And as long as the card reports to all three credit bureaus and you use it responsibly, it helps you build your credit the same way an unsecured card would.

Many people start with a secured card and eventually graduate to a traditional, unsecured credit card.

Compare Credit Cards

Another option is to ask someone you trust, like a spouse, sibling, or close friend, to add you as an authorized user on their credit card account. When you’re added as an authorized user, the payment history and credit limit on that account often get added to your credit report. If the primary account holder keeps the balance low and always pays on time, that positive history can boost your score, even if you don’t use the card yourself.

Important: Make sure the card issuer reports authorized user data to the credit bureaus. Otherwise, it won’t impact your score.

Other Smart Ways to Rebuild Your Credit Score

Opening three credit cards isn’t the only way to rebuild your credit score. Here are a few other options. (And remember, you can join our credit education program for free here.)

1. Keep your credit card balances low. Preferably, you should pay your bills in full each month or keep the balance below 30 percent of the limit month-round, or 10 percent if possible. If you max out your credit cards or carry a high balance, the credit-scoring bureaus will assume you are having financial struggles.

2. Remove errors from your credit report. About 40+ percent of people have errors on their credit report. Our free credit-education program gives you all the templates you need to dispute and correct these errors.

Open an installment account. Credit-scoring bureaus like to see that you can handle a mix of credit, so opening three credit cards and an installment account gives shows the credit bureaus that you can juggle different types of obligations.

How the Sparrow Rewards Mastercard Fits In

The Sparrow card might work as one of your three revolving accounts, especially if you like the idea of earning cashback for good habits. But it may not be the strongest option if:

• You prefer autopay
• You’re concerned about fees
• You want a simpler or more beginner-friendly experience

At the end of the day, there’s no such thing as a one-size-fits-all credit card. The Sparrow Rewards Mastercard can be a useful tool in the right hands, but credit rebuilding isn’t just about what card you carry. It’s about how you use it. So don’t just chase approval. Choose credit products that align with your financial goals, support your habits, and build your confidence.

Want to see a list of credit cards that actually help you rebuild? We’ve done the research and pulled together a trusted list of the best cards for bad credit. Check out our recommendations here.

What Is Klarna?

Klarna is a financial technology company that gives shoppers flexible ways to pay over time. Rather than requiring full payment upfront, Klarna lets you choose from several short-term and long-term options, depending on the type of purchase and your eligibility.

When you choose Klarna at checkout, you’re typically offered one of several payment options:

• Pay in 4: Split your purchase into four equal, interest-free payments, paid every two weeks. This option does not get reported to the credit bureaus and typically involves only a soft credit check. (We’ll explain “soft” credit checks in a minute. Keep reading!)
• Pay in 30 Days: Get your item now and pay the full amount in 30 days. Like Pay in 4, this option does not appear on your credit report unless payments are missed.
• Financing Plans: Choose monthly payments over 6, 12, or even 36 months. These longer-term options may involve interest, a hard credit inquiry, and reporting to the credit bureaus.

Does Klarna Affect Your Credit Score?

Klarna can affect your credit score in two main ways: 1) through a hard inquiry; and 2) through an installment account that is reported to the credit bureaus. Let’s start by taking a look at this question: Does Klarna affect your credit score through credit checks, also known as credit inquiries?

Hard Inquiries Versus Soft Inquiries

A credit inquiry is exactly what it sounds like: someone is requesting information about your credit score. This is also known as “pulling” your credit report. Inquiries account for about 10 percent of your credit score, so they matter—but not as much as things like payment history or amounts owed.

There are two types of credit inquiries: soft inquiries and hard inquiries.

A soft inquiry, or soft pull, occurs when someone reviews your credit report for reasons unrelated to a new credit application. This includes checking your own score, getting prequalified, or using certain buy now, pay later services. Unlike hard inquiries, soft pulls do not affect your credit score in any way.

A hard inquiry happens when you apply for a new credit account, like a credit card or loan. This type of inquiry can cause a small drop in your credit score, especially if your credit history is limited. The reason? Credit bureaus view hard as a possible red flag that you might be preparing to take on too much debt or struggling to pay your bills.

However, people can often worry too much about inquiries. The impact of a hard inquiry is usually temporary. Most people see their score rebound within a few months, as long as they make payments on time and keep their balances low. Also, credit scoring models group similar inquiries (like those made while rate shopping for a car or home loan) into a single event if they occur within a 14- to 45-day period.

Hard inquiries affect your score for about one year, but they remain on your credit report for two years.

Klarna and Credit Inquiries

Klarna may perform a soft or hard inquiry depending on the payment option you choose. Their short-term products like Pay in 4 and Pay in 30 Days typically involve only a soft pull and are not reported to credit bureaus unless payments are missed.

But if you choose one of Klarna’s longer-term financing plans, a hard inquiry is likely, and the loan may be reported to the credit bureaus.

Klarna and Installment Accounts

When evaluating whether Klarna affects your credit score, it’s important to understand that Klarna’s financing plans can show up as installment accounts on your credit report. When you use Klarna’s financing options (not its Pay in 4 or 30 Days), the account shows up as an installment account on your credit report. This isn’t necessarily a bad thing: Installment accounts can help your credit score if you make payments on time because they add to your credit mix and strengthen your payment history.

That said, having too many installment accounts can hurt your score, especially at first. This is because it signals to the credit bureaus that you might be over-leveraged and in danger of being unable to pay your bills. Having a high balance-to-loan amount ratio can also be damaging to your score, but the longer you pay down your balance, the more your score will improve.

Want help improving your credit while you use services like Klarna? Get free access to our credit education course and learn the smart way to build and protect your score.

Enroll for free

Be Careful!

These buy now, pay later tools can make it easy to overextend yourself. Taking on too many installment accounts—or borrowing more than you can comfortably repay—can lead to missed payments and rising debt, both of which can hurt your credit.

Klarna also notes that it may report missed payments for certain short-term products if they are not resolved in a timely manner, including the Pay in 4 and 30 Days options. So even if your plan started with a soft inquiry, it could still end up affecting your credit if payments go unpaid.

Pros and Cons of Using Klarna

Whether Klarna is a smart choice really depends on why you’re using it. Some people turn to buy now, pay later options to spread out the cost of a big purchase without interest. Others use it to manage cash flow when money is tight. Whatever your reason, it’s worth looking at the potential benefits—and the trade-offs. Here are some of the main pros and cons to consider.

Klarna Pros

1. Interest-Free Payments: Most of Klarna’s short-term options (like Pay in 4) come with no interest, making them a great alternative to credit cards that charge double-digit APRs.
2. Instant Approval: Approval decisions are made quickly, often in seconds. You don’t need a high credit score to qualify for the Pay in 4 or Pay in 30 Days
3. No Upfront Cost: You get the product right away and pay over time, which can help with cash flow.
4. Widely Accepted: Klarna is integrated with many well-known retailers, from fashion and electronics to home goods and travel.

Klarna Cons

While Klarna can be convenient, there are also some downsides:

1. Not All Plans Are Interest-Free: Some long-term financing options charge interest, and APRs can be high depending on your credit profile.
2. Temptation to Overspend: Splitting payments into smaller chunks can make purchases feel more affordable than they really are. This can lead to overspendingand accumulating debt.
3. Late Fees: If you miss a payment, Klarna may charge late fees. While they are usually small, repeated missed payments can add up.

Potential Impact on Credit Score

Does Klarna affect your credit score? That depends, so let’s recap what we have learned in this article:

• A hard inquiry for a financing option will hurt your credit score, but only briefly, and only by a few points, assuming that all of your other credit behavior is positive.
• A soft inquiry for a shorter plan, like Klarna’s 30 Days or Pay in 4, will not hurt your credit score.
• A missed payment, regardless of your plan, will likely hurt your credit score.
• The installment account added to your credit report when you use Klarna’s financing plan can help your credit score as long, especially as you pay your debt down. However, if you have too many installment accounts, your credit score could suffer because the credit-scoring bureaus might think you are in danger of having too many financial obligations.

So in short: Does Klarna affect your credit score? The answer depends on the plan you choose and how well you manage your payments.

Ready to protect and grow your credit the smart way? Our free credit education course shows you exactly how to build your score—even if you’ve made past mistakes. Learn what lenders really look for and how to make every payment count.

Enroll for free