If used right, credit cards can be a great tool to build your credit and open you up to better offers. In this article, we’ve outlined the golden rules of how to do just that.
If your credit rating’s looking a little worse for wear, then don’t despair. By following a few simple rules with your credit card, you can soon improve your credit and open yourself up to all the benefits that come hand-in-hand with a higher rating.
Why is building your credit important?
Your history of managing credit plays an important role in any future credit applications (for a credit card, mortgage, loan, or store card, for example). Lenders will look at your credit history to check whether or not you’re a responsible borrower, and this will help them to decide whether or not to accept your application for credit.
Although a less-than-perfect credit history doesn’t necessarily mean you won’t be accepted for credit, it can impact a couple of things:
1) It could reduce the pool of lenders who’re willing to lend to you, which can lead to missing out on the best offers out there.
2) It can affect the competitiveness of your credit terms - i.e. the interest rate you’re offered. This is because, more often than not, lenders save their best interest rates for borrowers with the best credit histories, because they have more assurance they’ll get back what they’ve lent on time and in full.
How to use your credit card
So, let’s get to it. By following these five golden rules when using your credit card, over time, you should see a gradual improvement in your credit rating.
Always pay on time and in full
Whether you’re paying off another credit card, a loan, your phone contract or utility bills, always, always make your payments on time. Each payment made to schedule works like a little tick next to your name.
On time payments leave a positive mark. Missed payments leave a negative mark. The more positive marks you have, the better your credit history. The more negative marks you have, the more you’ll damage your credit history. It’s as simple as that.
If you can, it’s also best to clear your credit card in full each month. Although you can get away with making the minimum payment, by doing this, you’ll have to pay interest on what you owe which a) makes it a more expensive way of lending, and b) takes longer to clear your debt.
Keep your credit utilisation ratio low
Your credit utilisation ratio is the difference between how much money you have available to you and how much of that you’ve actually spent.
For example, if you have a credit card with a £1,500 credit limit and you’ve spent £1,000 of that limit, your credit utilisation ratio would be 66% - which is quite high.
There’s no magic number when it comes to the world of credit utilisation ratios but, as a rule of thumb, lenders like to see it lying around 30%. If yours is way above this, make it your mission to reduce it to as close to this mark as you can - and keep it there.
Keep accounts open
The longer you’ve had a line of credit open, the more predictable you are to future lenders. This is because they can review your borrowing behaviour over a longer period of time, which allows them to build a more accurate picture of how you handle money.
So, instead of jumping from credit card provider to credit card provider and opening and closing accounts after a short period of time, do your research, find a lender that meets all your needs, and stick with them.
Put yourself on the map
If your credit history is completely non-existent, credit cards can be a smart way to put your money management habits on the map and start showing current and prospective lenders you’re financially responsible.
Your lack of credit history may make it harder to secure a credit card with the best interest rates and perks, however, there are lots of creditors out there who specialise in lending to people with poor or non-existent credit histories. And remember, if you clear your debt on time and in full each month, you won’t have to stump up the interest anyway.
Once you’ve done your research, found a lender that meets your criteria and been accepted, try to make a point of making small but regular payments on your credit card. By sticking to your monthly payments and clearing them in full, over time, you’ll gradually prove you’re a responsible borrower, improve your credit history, and open yourself up to more competitive offers.
Check before you apply
Last but not least, whether you’re looking to take out a second credit card or open your very first, don’t fall into the trap of making multiple applications over a short space of time. This can make you look desperate to access cash which can raise alarm bells for many lenders.
Instead, take your time and thoroughly research all your options before you make an application. By doing this, you’ll increase your odds of being accepted in the first instance and eliminate the need for second, third or fourth applications.
So, there are our five top tips on how to use your credit card to build your credit. For more credit card-related hints and tips, head over to our dedicated section on them here.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.