How credit cards affect your credit rating. Don't be fooled.

By Natasha Culzac
1

A well-managed credit card can give a boost to your credit score, however there also pitfalls that you may not expect.

A credit card can be a boon for your financial attractiveness, but remember that every rose has it's thorns. If you’re currently using one, or want to get one to help your credit score, then this short guide will help you to understand the advantages and the pitfalls of spending plastic.

The good

A credit card most benefits your rating when you are spending on it and – this is the important bit – paying your monthly bills on time. A credit score edges up when your report shows consistent and reliable payments that are never late. The longer you can do this, the better your score will get, especially if you can pay more than the minimum.

You don’t have to clear the entire balance each month, but to do so just means that it’s cheaper for you i.e. you won’t have to pay any interest on the balance you owe. Be aware, however, that if you do this regularly with a bunch of cards, lenders might not look favourably on it – they want to earn money off you somehow!

There are many credit-building cards out there for people with a poor history. The APR and interest rates might be a bit nuts, but if you can pay the balance off in full you won’t be affected by this.

The bad

There’s an annoying fine line between what’s helpful and destructive when it comes to credit cards. For example, a maxed-out card negatively impacts your score. As a guide, you should use less than 50% of your limit. Lenders can see how much available credit you have to your name and if you’re using it all, it doesn’t look good.

But at the same time if you pay off and close down a card, that too can reduce your score – because suddenly there is one less line of credit for them to monitor you with. Scores rely on being able to predict your future financial behaviour and if you have nothing with which they can do that, you start to become a mystery. The upshot of this, is that even if your score did go down as a result of you closing down a card, some lenders see you as responsible so view it as a positive. Go figure!

The same goes for unused credit cards. Too much available credit can be bad. You might think that having four cards gathering dust in your bedside drawer can’t surely be a bad thing, but lenders will be wary and with so much open yet unused credit, you will be viewed as a fraud risk.

Further things which can harm your score include flitting between different card companies, opening and closing cards here and there – some scoring systems reward long-term relationship - and busting through your credit limit.

The ugly

It almost goes without saying that missing payments or defaulting on a credit card is bad, bad news. This will blast your score and make it harder to get credit in the future. Don’t forget that your report goes back six years, which is why it takes a long time to cultivate and harness a good credit history.

Top takeaway

A credit card can definitely give a much-needed boost to your credit score, but you must be wary of the downfalls. Make sure you keep up repayments and never go over your limit. Consistently good financial behaviour will bump up your score and make you more attractive to lenders. Want to rebuild your credit? Take a look at these credit cards that are aimed at people with a poor credit history.

 

By Natasha Culzac


Thanks to a journalistic career history and a childhood at Sylvia Young Theatre School, Natasha has her fingers in a few professional pies, doing her best impression of a model and actor as well as personal finance writer. Outside of work she compulsively watches BBC period dramas and constantly lies to herself that this year will be the year she learns French, once and for all.

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