Credit cards are one contributing factor to your credit rating, here we will look at the positive and negative effects that credit cards can have. Credit rating companies look at numerous ways in which you use your credit card, and these factors influence your credit score. This score is important for future loans, renting apartments or getting a mortgage. Mainstream lenders base their lending decision heavily on this score.
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Payment History
How timely you’ve made payments on credit is a large factor, making up over a third of your overall credit rating.
Positive impact: Paying your statements on time gives you a higher credit rating as it shows you’re responsible with repaying your credit. A positive payment history demonstrates your creditworthiness.
Negative impact: Late or missed payments can hurt your credit score and can stay on your credit report for up to six years as a default.
Credit Utilisation Ratio and Credit Limits
This ratio measures how much of your credit allowance you are using. Higher limits can help or hurt based on how you use them.
Positive Impact: Keeping your utilisation below 30% helps improve your rating. It shows you manage borrowing well and aren’t living at the limit of your means. If you have a high limit but use little of it, this helps lower your utilization ratio.
Negative Impact: Using over 30% of your allowance can lower your credit score, aim to always have two thirds left untouched. A higher limit might lead to overspending and higher balances if not managed well.
Credit History Length
The age of your credit accounts matters too. A longer history can help you. This shows lenders you have a track record, giving you more credibility.
Positive Impact: Having a long-standing card that you manage well can boost your rating.
Negative Impact: Opening new accounts often or closing old ones lowers the average age of your accounts.
New Credit Applications
Every time you apply for a new card, this will show up on your report. This can lower your score temporarily.
Positive Impact: If you do not apply for new cards often, this will not hurt your score much.
Negative Impact: Applying for many cards at once can suggest financial trouble and lower your score.
Total Debt
The total amount of debt you have also affects your rating.
Positive Impact: A small amount of debt comparative to your income, so your debt is affordable. This shows you have more ability to pay off your debt and aren’t so reliant on your circumstances from month to month.
Negative Impact: Having a large amount of debt will show that you may struggle to pay this back comfortably and if there were an unforeseen circumstance this would affect your ability.
Transferring Balancing and Closing Cards
Negative Impact: Transferring balances and closing a card reduces available credit and raises utilisation if you have balances on other cards.
Positive Impact: If closing a card with high fees makes sense, it could be wise, and can also mean you have a lower interest rate. Just be careful about the effects on utilisation and history length.
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