Credit Cards and Credit Score: How Credit Cards Can Affect Your Report?
What is a Credit Score
A credit score or credit rating is a number that determines your credit worthiness. Depending on the credit reporting agency, your credit score can range from 0 – 999 or your credit rating can range from bad to excellent. In the UK, the main credit reporting agencies are Experian, Equifax or TransUnion.
A good credit score is a delicate balance between having credit and using some of the credit, but not too much.
In Ireland the Central Credit Register (CCR) provides credit report but unlike credit reporting agencies in the UK they don’t produce a credit score or credit rating. To a credit lender, a high credit score indicates a high chance of meeting your credit obligations and lending to you is less of a risk. Having and maintaining a high score will make your financial life easy, you are more likely to get approvals for the best credit cards, get better interest rates for personal loans and best mortgages. Generally you save money over time because you have a better chance of being approved for credit at the best rates. On the other hand having a poor credit score or credit rating creates difficulties for you because you spend more on financing your loans, credit cards, and other lending products.
Examples of who will use your credit score:
- Banks and other Financial institutions will use your credit score to make credit application decisions and set your interest rate based on a favourable rating.
- Estate agencies including rental agencies may use your credit score to evaluate whether or not to rent a property to you.
- Service providers like mobile phone may use your credit scores to screen you for payment ability and cost of service.
- Most potential employers will check your credit history as part of pre hire screening especially for jobs that require access to or management of funds.
Factors that affect Credit Score
- Payment history – A long history of timely credit payments will boost your credit rating. Missed payments, overdue bills and late payments all have negative impact on your credit rating.
- Debt balance – Carrying a huge balance on your credit card and having too much loan exposure can heavily affect your credit score. You should aim at a utilization rate of 30% or less of your card’s credit limit.
- Long credit history – A credit history that suggests that you manage your finances responsibly will positively impact your credit line. A long history of making payments on your line of credit on time and managing your overall credit will boost your credit score because it reflects that you have experience managing credit. Alternatively new credit accounts and closing existing account will lower your credit score. Defaults and late payments will hurt your credit.
- Diverse portfolio – If you hold a credit card, mortgage , student loan , car loan and other credit account is an indication that you can manage a wide range of credit accounts and this will positively affect your credit.
- Frequent credit applications – Making several credit applications in a short period of time will impact your credit score negatively.
Other factors that affect credit score for UK residents
- Not on electoral register
- County court judgement against you.
If you are based in Ireland click here to see what is not included in your credit report
Factors that does not affect Credit Score
- Change in income and salary
- Getting married
- Getting divorced
- Checking your credit report
- Being denied credit
How to Check Your Credit Report?
Check your credit score quickly online at Experian.
If you are based in Ireland, you get a credit report instead of a score. You can request your credit report free of charge and at anytime. You will need to provide a form of identification, proof of address and proof of PPSN
Click here to see your credit report if you are based in Ireland
>> Read More: What is a Central Credit Register?
How Credit Cards Builds Credit Score
Getting a credit card and using it responsibly is one of the best and efficient way to build your credit history.
Useful tips on how to use your credit cards to build your credit score
- Pay your bills on time.
- Pay off your outstanding balance in full
- Use your credit card to purchase only what you can afford to pay off.
- Adopt the rule of spending 30% or less of your credit limit and keep the balance low each month.
How Credit Cards can Damage your Credit Score?
Making new applications: New application for a credit card means that a credit check will be done and this could affect your credit score, especially if you make a number of full applications in a short period of time. Many credit card providers like An Post Credit Cards and Avant Money Credit Cards now offer an eligibility check which is a soft credit search, helping you to find cards you’re eligible to apply for, without impacting your credit score.
Going over your credit limit: Credit card providers are required to report details and balances on your credit card and will report instances where you go over your agreed credit limits. To a lender this can impact your credit score for a number of reasons. Not only will your credit utilisation ratio be too high, but being over your credit limit suggests you could be struggling to manage your finances.
High Outstanding Balance: Carrying a large outstanding credit card balance and balance very close to your credit limits, suggests that you are very reliant on credit. It suggests to lenders that if your circumstances were to change, you would struggle to repay your debts. This will influence the way lenders or other service providers view you and any new applications you make.
Making Payments Late: The proof of managing your finances responsibly is being able to make your payments on time. Lenders are required to report arrears, missed, late or defaulted payments, which may negatively impact your credit score. Setting up a direct bit to make payments automatically at a set date and making sure there’s enough money in your bank account to cover payments when they’re due, is a way to help you manage your finances easily.
How Closing a Credit Card Account Can Affect Your Credit
Paying off and closing your credit card account on the surface looks like a positive impact to your credit profile but at first it lowers your credit score of profile with a lender. This is because your credit utilisation ratio will change and can be higher. The difference between your available credit and the amount of credit you have used will become narrower if you close a credit card account and could lower your credit score.
Another reason is that to a lender, keeping a credit account for a long time and managing it well helps to demonstrate that you are credit worthy and can manage credit responsibly.
The negative impact of closing a credit card may be temporary because it may be just what you need to improve your finances.
