Credit cards and how you use them is a significant factor a lender will take into account when you apply for a loan. Even just owning a credit card will affect your credit file as well as making purchases and paying off the balance. They can be very telling about you as a borrower – do you pay your monthly instalments on time? Are you responsible with money? Can we trust you not to default on payments?
Keeping up a good relationship with your credit cards is a sure-fire way to make sure you are as creditworthy as you can be. It’s easier than it seems too; the notion of having a credit card can be intimidating as the threat of debt is a real concern for most, but managing your credit card balance is a breeze.
Getting a shiny, new first credit card
First off, chances are if you don’t have a credit card, you don’t have a credit history. Without a credit history, it is difficult for lenders to asses you, therefore, resulting in rejections. Taking out a credit card is the quickest and most painless way of fixing this problem. They are pretty easy to get approved for and are one of the most controllable ways to manage your credit. Applying for one as soon as possible will work in your favour. It is always better to have a longer credit history as this will give lenders a lot to evaluate when considering whether or not to approve you for loans and mortgages, so if you don’t already have a credit card, you should probably consider getting one! Shop carefully: always try to find the credit card with the lowest interest rate (APR) to ensure you pay back less every month and don’t end up paying way more than your original balance.
The delicate art of balance juggling
If you already have a credit card or two, the trick is to ensure the balance on the card is as low as possible – even better if it’s zero! Credit cards are often seen as “free money” to the irresponsible, which is how late and missed payments happen; a lender likes to see a borrower who does not miss payments and whose credit card balances are not nearing the limit. It shows you as being responsible and trustworthy, thus improving your chances of being approved for larger loans and mortgages significantly. Having a total credit limit usage (across all your credit cards) of under 30% is a good aim, but under 10% is favourable to lenders.
The potential pain points
This must be making credit cards sound fantastic, but some undesirable effects can happen when applying. When being offered a new credit card, it can be difficult to say no, especially when chances are, you’ll be approved for it. The most important thing to remember is that every time you apply for a credit card, this shows as a hard search on your credit file – any lender that looks at your file after this application can see it, and it will stay there for 12 months. A few are no issue, but if there are too many hard searches present on your credit file, this could indicate to a lender that you are desperate for money or cannot manage the credit you already have. Not the impression you want to give! It is hard to determine exactly how many credit cards are “too many” for a lender, but it may be best to try and raise the limits of the credit cards you already have as opposed to applying for various new ones.
Like most things in life, good things come in small doses. Getting a credit card that you’re able to easily manage the balance on, with a high credit limit, can do wonders for boosting your creditworthiness. Your whole history is available for the lenders to view, so as long as you are responsible with your credit, having a few credit cards under your belt can only put you in a better position for your future financial endeavours.