One of the six Credit Factors on Credibble’s 24-Factor Credit Check is based on your use of credit cards. A credit card can be a really great way to start building credit, as long as you use it the right way.
Here’s a quick explainer of the four things lenders will be paying close attention to when they take a look at your credit card history.
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First things first – to have a credit card history, you need to have a credit card. Stop us if we’re going too fast for you.
It’s just common sense. For lenders to be encouraged by your credit card usage, you have to actually have a credit card to use. So if you don’t have one, that can be way of starting to build credit straight away.
However, if you do have one, you can still slip up. Lenders want to see credit card usage under 10 percent – ideally between 1 and 9 percent. But what does that mean, exactly?
Essentially, lenders only want to see you use a very small percentage of your credit limit.
Say, for example, that you have a card with a £1,000 limit (as is the case with many starter credit cards). Lenders want to see you borrowing less than 10 percent of that limit, which is £100. Ideally, you’d want to stick to borrowing between £10 and £90, then paying back later.
So, you could use your credit card to buy a snazzy new pair of trainers, or a bottle of wine or two, and still keep within that limit.
It’s not the end of the world if you end up borrowing more than 10 percent, of course – unexpected costs do arise! In this case, lenders suggest that you avoid borrowing more than 30 percent.
Returning to our £1,000 limit example, that would be £300. If you need to arrange for phone repairs or an oil change, then you can easily stick within this limit.
And of course, never ever go up to, or worse, over 100 percent. This tells lenders that you’re struggling for money, and certainly doesn’t make you look like a trustworthy borrower.
You might be mistaken in thinking that a lower credit limit means a better Credit Report. Not so.
As with many things, it’s about scale: £300 of a £1,000 limit constitutes 30 percent of the limit. But if you have a £3,000 limit, that’s only 10 percent of the total limit. This indicates you can take on more debt, but still manage to pay it off.
The higher your limit, the better your creditworthiness.
If there’s one thing to try and avoid doing with a credit card, it’s cash withdrawals. Making a withdrawal from a credit card is different to a withdrawal from a debit card. A debit card is linked up to a current account. This means that by default it will draw from funds held in your account, and if you have an overdraft, it will then draw from that.
You can think of a credit card as an overdraft without a current account. Whenever you spend money on a credit card, it’s always borrowed money, never your own money. When you withdraw cash on a credit card, it sends the message that you don’t have any money in your current account to use.
Now, this might not be true. Perhaps you left your debit card at home and realised you forgot to pull out some money to pay the hairdresser, and your credit card is all you have to hand. But without that context, lenders simply can’t afford to take the risk.
What’s more, since credit cards are not usually meant to be used for cash, card issuers usually have fees for cash withdrawals. This is usually a percentage with a minimum.
For example, if you have a credit card with a withdrawal fee of 2.99% and a minimum of £3, and you pull out £20, you’ll actually be charged £23. Pull out £200 (don’t try this at home) and you’ll be charged £206. So avoid withdrawals when possible!
A small credit card withdrawal now and then isn’t going to cause great harm, but do it repeatedly and you could find yourself in trouble. Try to keep your debit card to hand whenever you go out. It’s more easily done these days, since you can put your contactless debit card on your phone. And in the wake of the COVID-19 pandemic, more and more shops and transport modes are moving to cashless.
As we mentioned above, one thing that is paramount with credit cards is trying not to spend past your agreed credit limit. Much like cash withdrawals, it shows lenders that you are stretched financially and your income isn’t enough for you to get by. This is discouraging to lenders, because it indicates that you’ll struggle to pay off the money you’ve borrowed.
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