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How do credit cards affect credit scores?
A credit card can affect your credit score both positively and negatively over time, so it’s important to learn how to use them responsibly. Read on to learn more.
What is a credit score and why is it important?
A credit score – also known as a credit rating – is calculated based on your credit history. This includes the amount of money you’ve borrowed, the number of credit applications you’ve made and whether you pay on time.
Credit scores are compiled by independent credit reporting agencies and form part of your credit report. If you’ve ever borrowed money (think credit cards, home loans or personal loans) you already have a credit score attached to your credit report.
Banks and other financial providers use your credit score to determine whether to give you credit or lend you money. A higher score means the lender will consider you less risky, therefore, the more likely you’ll be offered a loan.
At ANZ for instance, we work with three credit reporting agencies in Experian, Equifax and Illion to assess customer applications for loans.
How does a credit card affect your credit score?
As odd as it may sound, your credit card may impact your credit score positively over time, provided you use it responsibly. That’s because one of the key things credit reporting agencies look for is your ability to pay off your debts on time over a prolonged period.
According to most credit reporting agencies, it can take several months to establish a credit score, and several years after that to get it into the good-to-excellent range.
But be warned, a credit card can also harm your credit score if not used responsibly.
For example, if you make a habit of not paying your credit card bills on time, it could, over time, negatively affect your credit score. And the worse your credit score gets, the more it impacts your chances of being offered a loan further down the track.
But it’s not all doom and gloom! Below we explain how the responsible use of a credit card can improve your creditworthiness.
Three credit card tips to live by
- Repay your bill on time
Paying your credit card balance on or before the Due Date suggests to the credit reporting agencies that you can manage your money. Consider setting up alerts or direct debits so that you never miss a repayment.
- Pay more than the minimum
Always aim to pay the Closing Balance in full, or at least make more than the Minimum Monthly Payment when you receive your statement, as too much card debt can impact your credit score over time.
- Apply for one card at a time
Sending off multiple credit card applications over a short period of time can be a red flag to lenders and ultimately harm your credit score. It’s best to do your research and only apply for the card that suits you most.
Does having multiple credit cards affect your credit score?
In theory, there is nothing wrong with having several credit cards. But here’s the thing, the more cards you have, the more it lowers your debt to credit ratio – also known as your credit utilisation rate. Your credit utilisation rate is the amount of credit you’re actively using compared to the total amount of credit banks and other financial providers are willing to lend you, such as when you apply for a home loan.
Also, the more credit cards you have, the more repayments and due dates there are for you to manage. Falling behind on your repayments can impact your credit score. That’s why it’s recommended that you only have as many credit cards as you can manage.
The higher your credit score, the better
Depending on which credit reporting agency you go to, you may get a different score. In other words, what’s considered a “good credit score” will vary from place to place.
Generally, your credit score will sit somewhere between 0 and 1,000 or 0 and 1,200, depending on which agency is calculating your score. No matter where you go, a higher number always means a better credit score.
For more information on good credit scores and ratings visit the Credit Smart website.
Ready, set, check! How to check your credit report
The credit reporting agencies will provide you with one free credit report per year. Additional reports can be requested at a cost.
To obtain your credit report, you’ll need to contact one, or a combination of the credit reporting bodies below. Alternatively, visit Credit Smart for more information.
Decisions? Decisions? Need help choosing a credit card?
Choosing a credit card can be tricky, which is why we’ve built a handy tool to get you started. Simply answer three questions to see which card could be a good fit for you.
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