What is a credit score?
Your credit score is a number that gives lenders an idea of how good you are at managing credit and paying back money you borrow. Lenders use this score to decide if they should give you a loan, credit card, mortgage, or other forms of credit. They also use it when deciding what interest rate to charge you.
Many factors go into your credit score, including:
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Your payment history is the biggest part of your credit score. It shows how you manage your money and whether you pay your bills on time. Late payments can lower your score, while paying on time helps it go up.
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Credit utilisation ratio looks at how much of your available credit you’re using. For example, if you have a credit card with a £1,000 limit and you’re using £500, your utilisation is 50%. Lower is better, with the ideal being below 30%. Using too much of your available credit can harm your score.
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Length of credit history considers how long you’ve had your credit accounts. A longer credit history is usually better as it gives a clearer picture of how you handle credit over time.
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Having a mix of different types of credit, like credit cards, mortgages, and car loans. Whilst having credit isn’t necessarily crucial to being accepted, it can help. Managing existing credit well shows you can handle different kinds of debt responsibly.
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How often lenders check your credit report. When you apply for a new credit card or loan, it creates a hard search on your credit file, which can temporarily lower your score. Lots of inquiries in a short time can be a red flag to lenders.
Understanding these parts of your credit score can help when applying for credit.
How does applying for a credit card affect your credit score?
Applying for a credit card can affect your score for a couple of different reasons:
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A hard search on your credit file when you apply for a credit card. The card provider checks your credit report to see how you've managed credit in the past. This check is called a hard search and can cause your credit score to temporarily drop a few points.
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A new line of credit on your credit report. If you get approved for the credit card, it will appear as a new line of credit on your report. This can influence your score in different ways. Managing your credit card well will show you are a responsible borrower and build your credit score over time. Missed or late payments could have a negative impact.
How a credit card can help your credit score
Using a credit card responsibly can help improve your credit score. Here’s how:
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A new card increases your total available credit. If you don’t increase your spending, this lowers your credit utilisation ratio. Using less credit than you have available to you can help your score.
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Having a good credit mix like credit cards, loans, and mortgages can improve your credit score. If you only have one type of credit account, getting a new credit card can add diversity to your credit profile and potentially boost your score.
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Making timely payments on your new credit card can help establish a positive payment history. This is a big factor in determining your credit score. Consistently paying your credit card bill on time shows lenders that you’re responsible with credit.
How a credit card can harm your credit score
Getting a credit card can also have negative effects on your credit score if you misuse it.
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A new account lowers the average age of your credit accounts. Since credit scoring models favour older accounts, this can slightly lower your score. It doesn’t tend to make too much of a dent unless you open a lot of new accounts in a short time.
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Overspending or carrying high balances increases your credit utilisation ratio. High credit utilisation can negatively impact your credit score, especially if it exceeds 30% of your available credit.
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Late or missed payments on your credit card can significantly harm your credit score. Payment history is one of the most influential factors in determining your credit score. Consistently paying your bills on time is crucial for maintaining or improving your score.
Things to consider before applying for a credit card
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Your credit score. Know where you stand financially. Some cards require a good credit score to be accepted.
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Your goals. Why do you want the card? To build credit, get rewards, or manage debt? Do research to find the card that best suits your needs.
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Check interest rates and fees like annual fees or late payment charges.
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See if you get rewards like cashback or points, and if they suit your spending.
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Introductory offers like a 0% interest period or a bonus when you sign up.
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Read the terms and conditions to make sure you understand things like when payments are due and any penalties.
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The credit limit. How much credit are you offered? Can you manage it without overspending, and does it meet your needs?
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Make sure you’re applying for the right credit card for you. The more applications you make, the more it can impact your score. It’s important to shop around and use an eligibility checker so you know whether you’ll be accepted before you apply.
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Know your budget and spending habits. Make sure you can pay off what you spend each month without trouble.
By considering these points, you can apply for a card that fits your needs and helps you manage your money better.
Ocean Credit Card
See if it's a YES before you apply
- Up to £1,500 credit limit
- Checking won't affect your credit score
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39.9% APR
Representative (variable)
Intelligent Lending Ltd (credit broker). Capital One is the exclusive lender.
Disclaimer: All information and links are correct at the time of publishing.
Fiona Peake
Personal Finance Writer
Fiona is a personal finance writer with over 7 years’ experience writing for a broad range of industries before joining Ocean in 2021. She uses her wealth of experience to turn the overwhelming aspects of finance into articles that are easy to understand.
