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.