Does having a credit card improve credit score?

Does having a credit card improve credit score?

Having a credit card can be a smart financial decision if you use it wisely. There are reward points to enjoy, cashbacks to benefit from, and the added convenience of cashless and online shopping.

Yes, having a credit card is liberating, but this freedom comes with its share of responsibilities. As a credit card user, you must be careful not to overspend and clear all charges as soon as you can. Staying on top of your credit card debt is important when you consider how it can impact your credit score. The impact on your credit score starts from when you apply for a credit card and carries through to how you use it. You might be surprised to hear that even not having a credit card can impact your credit score.

How can using a credit card help your credit score?

Your credit score is a number between 0 and 1000, and major credit bureaus calculate it based on the information available on your credit report. The score helps illustrate to lenders the probability that you can pay back any loans or debts you have. When it comes to your credit card, your card issuer updates one or more of the three major credit bureaus monthly, who then include it in your credit report. Your outstanding balance, credit limit, account status, payment history, and even the date you opened the account will influence your credit score.

If you don't have a credit card, your credit score could be negatively affected. The absence of an open, active account on your credit report can mean you don't have a credit score at all or have a low score due to less information. Having a low or no credit score could make it exceedingly difficult to get approvals on a mortgage, car loan, or even while renting an apartment.

How will getting a credit card improve my score?

Credit cards are perhaps the most accessible type of credit accounts to get approved for quickly. That makes them the ideal vehicle to establish and build a good credit history. Of course, you need to manage your credit card well. This management includes not using up the entire available credit limit on the card. Even if you max out your card once and pay it off in time, your credit report could still show that as a ‘high balance’, which is frowned upon by most lenders. A good idea is to try and keep your credit card usage below 30 per cent of your credit limit, so you don’t raise any red flags and don’t get labelled as a risky borrower.

To make sure your credit cards don't hurt your credit score, you’ll need to keep them open and active with low unpaid balances. Use your oldest cards regularly, since they will keep your credit score in good standing, but don’t stop looking out for a better credit card deal. If your credit score is good, you could be eligible for a credit card with better rewards and terms than what you have currently.

I already have one credit card. Does getting a second credit card hurt credit score?

Having multiple credit cards affects your credit score in many ways. The most significant is that there is a record of each application on your credit report, which increases your credit enquiries. A credit score doesn’t track whether your application was approved or rejected, however the act of making an application can harm your score. Moreover, with more than one credit card, you are taking on more risk, as you may not be able to track multiple bills and due dates. It also increases your overall credit which can make you look like more of a risk to lenders.

Unfortunately, there is no way of knowing exactly how many credit cards you can have without affecting your credit score. Each individual’s personal circumstances would change this number. To stay on the safer side, you’d be best to keep your credit applications to a minimum.

Does paying off credit card raise score?

Paying off your credit card balance lowers your credit utilisation ratio, which helps your credit score. Your credit utilisation is an indicator of how much of the available credit you're using. A lower utilisation is better for your credit score, and apart from your payment history, it’s the most important factor when you apply for a loan.

However, don’t mistakenly close a credit card account after clearing all remaining debt, believing that it’s good for your score. When you close a revolving account, it’ll reduce your available credit. It’ll also increase your overall utilisation if you still have some balance on other credit card accounts, which will lower your credit score.

Does getting rejected for a credit card affect your score?

So, does this mean that you could apply for a credit card with a bad credit score to improve matters?

Unfortunately, it’s not that simple. While getting approved for a credit card is good for your credit score, a rejected application, when you already have a bad credit score, can have an adverse effect.

Applying for a credit card with a bad credit score could be a little stressful, but you can still do it if you know what is needed. Most lower-risk providers might not be willing to approve your application without a credit check. There are, however, ‘no credit check’ providers who can make the process easier for you. You could also consider approaching lenders or lending platforms that can conduct a ‘soft’ check on your behalf to gauge your chances of approval. These checks will not show up on your credit history.

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Learn more about credit score

Does a credit score check impact your credit score?

You may have heard that when a bank or lender performs a credit check, that it can impact credit score. But checking your own credit score isn't the same, and won't affect your credit score in the same way.

There are two types of credit checks that can be recorded in your credit history: hard credit checks and soft credit checks.

Hard credit checks occur when you apply to borrow money from a bank or lender, such as when you apply for a credit card or loan. A soft credit checks occur when your credit file is accessed outside of applications to borrow money, such as when you check your own credit score or credit history.

Checking your credit score is a request for information and not an application to borrow money, so it should not affect a lender’s decision to accept or decline your credit applications. As such, it's a soft credit check, and is unlikely to affect your credit score, positively or negatively.

 

What are some advantages of a good credit score?

You should know about the advantages of credit score improvement as there are many occasions when having a good score is helpful. If your credit score is categorised as good, very good, or excellent, it can indicate you have strong borrowing power. This may encourage lenders to give you special discounts on interest rates and other loan terms. You may also find it easier to get approved for a credit card or a property rental. You can also try to negotiate terms using your superior credit score as leverage.

A high credit score indicates that you are financially responsible, but it requires you to be disciplined. If you currently have a good credit score, you still need to remember not to apply too often for credit cards or loans as these can quickly pull down your score. On the one hand, you may have better access to credit, but your good financial habits mean that you may not need to access this credit. Having some credit products can help build up your credit report, and therefore your credit score. You would just need to keep the debt and limits to a minimum and pay the bills on time. It’s never advisable to take out credit that you can’t afford to pay as it negatively impacts your credit history.  Even if you have a good credit score, you can always improve it further.

Does borrowing money affect credit score?

Whether it’s through a home loan, a personal loan, or a credit card, borrowing money will affect your credit score. Taking on a home loan or a credit card may have a positive impact on your score, but too many loan applications can bring your credit score down.  

Every time you apply for credit, an inquiry is performed against your name. Too many inquiries can reflect negatively on your credit report, and if your loan application is rejected it will negatively impact your credit score.

How you handle your debt can also make a big difference. As long as you make timely payments you may be able to improve your credit score and overall creditworthiness. However, any missed or delayed payments will likely result in a negative impact on your credit score.

Why should I check my credit score annually?

You may not need to get your free credit rating every year, but it can help you stay informed. A yearly free credit report can help Australians keep track of the impact of various financial transactions on their credit score.

Your credit score helps inform financial organisations, particularly lenders, about the sort of payer you are. Depending on how you've paid down debt in the past, it will have affected your credit score in various ways. In Australia, the inclusion of Comprehensive Credit Reporting (CCR) means that you can find out which transactions affect your credit score positively, as well those that have a negative impact.

Because of this, you may want to consider getting a free credit report once a year irrespective of whether you’re planning to apply for a loan or take on other debt. Checking your credit report can tell you if there are errors in your credit file, which affect your credit score and need to be corrected.

How regularly does your credit score change?

There are plenty of things that can affect your credit score, but when they'll impact it can vary wildly, and often depend on when the information has been passed on.

Every credit enquiry is noted on your credit file, and this impacts your credit score. Thanks to Comprehensive Credit Reporting (CCR), it means you both positive and negative transactions can impact your score, but so, too, can the frequency. For instance, if you apply too often for credit cards or apply with multiple lenders for a home loan and aren't successful, you may see a decline. 

How long this information take to pass on is an important question, but the length of time often depends on the credit reporting agency. Some transactions can take a small amount of time, while others take much longer. For that reason, it's important to check your credit history regularly so you can be more aware of what your credit score looks like, and if you need to correct any of the statements made on it. 

What if your credit score has dropped for no reason

The importance of checking your credit score regularly is hard to overstate as the changes may not be as relevant to your life, and there may be the occasional error, but what should you do if it drops for no reason?

Credit reporting agencies calculate your credit score based on the information they receive from lenders, banks, credit card providers and utility companies, among others. This report takes into account both the credit enquiries these companies make, as well as your payment history with them, and may include other factors. But because some reports may come in at different times, delays can appear like drops. 

Suppose you missed paying a bill while on holidays and the supplier couldn’t reach you, or something like it -- in this instance, the provider may report the default to the credit reporting agency, which can cause your credit score to fall when the credit reporting agency eventually sees the information. Because of an obvious delay, the drop can seem random.

Regularly checking your credit score and the transactions that have appeared can provide some understanding as to why a credit score drop might have occurred, and even provide some understanding as to how you can fix the drop, improving your credit score in the process. 

Where can I check my credit report for free?

While you can get a free credit report in multiple ways, RateCity's own credit checking system allows you to find your score from two credit history systems, Experian and Equifax. 

When you request your free credit report, you'll likely need to supply some personal information, such as your name, contact details, and a personal identification, such as a drivers license number or another form of identification. 

Not only does a credit report show credit score, but it usually often contains positive and negative credit transactions covering the past five years of payments. 

What is a good credit score?

Across Australia's major credit score providers, Experian and Equifax, there are five tiers, ranging from "below average" to "fair" to "good", "very good", and "excellent", with your score designating where you sit. As the tiers suggest, an Experian credit score between 625 and 699, and an Equifax credit score between 622 and 725, is technically considered to be in the range of "good". Anything above this is even better.

However, lenders will typically favour the borrowers with the highest credit scores which means that applicants with a "good" credit score may not be offered an interest rate as competitive as one offered to a borrower with a "very good" or “excellent” credit score.

Do landlords check credit scores?

For landlords, credit score checks can tell if a potential tenant has a history of delayed or missed rent payments. Usually, a poor record of repayments is likely to result in a low credit score. Also, your credit history may include information from tenancy databases such as the number of times landlords have inquired about your credit score. 

If there are too many inquiries within a short time, landlords may conclude that you have had issues renting in the past.  However, there is no rule as to when landlords check your credit score. Some might check every time they receive a tenant’s application. In some cases, landlords may even rent out their property to tenants with a poor credit history if they can submit additional documents or sufficiently explain their situation and how they are trying to address it.

 What credit score do landlords look for?

Landlords may look for issues relating to repayment rather than a specific credit score, although a low credit score probably suggests that you’ve had repayment issues. In general, if your credit score is categorised good, very good, or excellent - which corresponds to an Equifax credit score range of 622 - 1,200, landlords may not scrutinise your credit history too closely.

Can I check my credit score without a driver's license?

In Australia, your driver’s license is the preferred identification document for credit reporting agencies. This means you may not be able to confirm your identity using another document, such as a proof-of-age card. You may have genuine reasons like concerns over identity theft for not wanting to provide your driver’s license number. Unfortunately, most credit bureaus won’t allow people to check their credit score without a driver’s license. 

If you don’t have a driver’s license, there’s a good chance you haven’t applied for credit in the past and don’t have a credit score at all. In case you are concerned about identity theft, credit reporting agencies can offer you paid packages that include insurance against identity theft. Such packages may also include monthly credit score checks or alerts whenever your score is updated.

Can a debt collector affect your credit score?

When a creditor is unable to contact you by phone or by sending you a formal notice in regards to outstanding debt, they will often outsource the job to a debt collector. The debt collector can try to reach you by phone, or they can attempt to contact you face to face. If they cannot get through to you by either method, they can only report back to the creditor but not directly report a payment default to the credit rating agency. So, can debt collectors affect your credit score? No, they cannot do so directly.

However, if you owe money, you have an obligation to return it or communicate your difficulty in doing so to the creditor as well as to any involved debt collector. If they cannot contact you, they can report a serious credit infringement against you, which may affect your credit score for many years. Creditors can also take the legal route, and a court judgment against you can also severely impact your credit score.

You should remember that debt collectors need to abide by specific rules and cannot harass you by repeatedly calling or visiting you, or by threatening to confiscate your possessions if you don’t pay up. Similarly, they cannot threaten to file a default against you, especially with a credit bureau.

Does home loan pre-approval affect credit score?

Home loan pre-approval can give you a better idea of the amount you can spend when buying a property. It can also tell you about the steps you need to take to finalise your home loan and receiving the funds. Depending on how you approach a lender, pre-approval could include a credit inquiry which does affect your credit score. Some lenders, however, may offer an online pre-approval which is faster and doesn’t involve a credit history check. An online pre-approval may only consider your financial capacity and offer suggestions on how to prepare yourself to take a home loan.

Most lenders, however, will likely prefer to make a full assessment of your financial situation by requesting a credit report in addition to your bank statements and tax returns. Such a credit inquiry, sometimes called a hard pull, is usually recorded on your credit file and can therefore affect your credit score. If you approach several lenders and all of them initiate credit inquiries, this will impact your credit score negatively. Sometimes credit reporting agencies make an exception in terms of including multiple credit inquiries if they are made within a certain period. It would still be best to avoid making multiple applications with different lenders.

Why your credit score may differ between Experian and Equifax

Two of Australia's biggest credit reporting bureaus are Experian and Equifax, and while they both do the same thing, it’s not uncommon to find that your credit score can differ significantly.

Firstly, Experian and Equifax each have their own credit reporting algorithms to interpret and quantify your personal credit history. That means that while they do the same sort of thing -- credit tracking and reporting -- they may not handle it in the same way. Your credit history may therefore be similar, but not identical between Experian and Equifax.

While neither reveals exactly how they work, each also likely work in different time frames, which means your credit history may be viewed differently between the two. One could look at the most recent, while another might be weeks apart. For this reason, scores can vary.

Finally, there are different scales at which they work, and depending on the types of transactions your credit history has seen, this may impact the overall result slightly different, thus making the scores different. 

Do you need a credit score to rent a property?

A credit score is used by banks and lenders to understand your financial health and wellbeing, but you may not be aware that it's used as a way for landlords to understand whether or not it's risky to get into a financial relationship with you.

When you’re looking to rent a property, your landlord may check your credit history to get a sense of your capability to pay rent in a timely fashion. Landlors may look at your history of repaying debts, and this as a benchmark to understand the likelihood of you paying your rent on time, or not.