Your credit report is one of the most important aspects of your financial life. It indicates to lenders the type of borrower you are and impacts your chances of loan approval now and in future.
Your report includes a detailed history of all the financial products you’ve applied for and how well you’ve managed them. Credit cards are considered to be the most “valuable” financial product to have listed on your report because they divulge juicy information about your ability to manage a line of credit. This in turn impacts your credit score. You can view your credit score for free here.
But your financial behaviour isn't the only thing that can affect your score as a credit card holder. The number of cards you own, your combined credit limit and the type of card you own can all play a role in determining your score. Let’s take a look below.
The type of credit card you own
If you’re trying to build up your credit history, there are a handful of credit cards that can help. For starters, look for a card with a low interest rate. This is considered to be anything ranging from 8.99 per cent to 14.99 per cent per annum. Student or first credit cards are another good choice for those with limited credit experience, while cards with a low credit limit will also be looked upon favourably by lenders.
The number of cards you own
Having too many credit cards on the go can lower your credit score. This is because you open yourself up to multiple repayments and carry a higher combined credit limit. If you want to boost your score, then one or two credit cards is the sweet spot. Just make sure you’re spending responsibly and paying off your balance in full each month.
Your credit limit
If you have one or more cards with a high credit limit, this can reduce your credit score. Carrying multiple unsecured debts and having access to extensive funds makes you more of a “risk” in the eyes of lenders. If possible, contact your card issuer and request to lower your credit limit. This can help reduce your debt-to-credit ratio which will in turn boost your score.
Late repayments will drag your score down, as will defaults. A late repayment becomes a default if it’s more than 60 days late and exceeds over $150 in value. Defaults can hang around on your credit report for up to five years and can raise a red flag over future credit applications.
On the other hand, making your repayments on time and paying off your balance in full each month shows you’re responsible with your money. It can also help to pay above the minimum repayment amount if your budget allows it. You’re usually only required to repay around 2 to 2 per cent of the total amount owing, but paying off your balance in full or above the minimum amount can reduce your interest and demonstrate to lenders that you can manage your credit accounts well.
Your credit card debt
If you have debt spread across multiple credit cards, consolidating them all in one place can help to improve your score. This is where a balance transfer credit card can come in handy. This type of card charges a low or no interest rate for up to 26 months, helping you to save on interest and pay off your debt quicker. Keep in mind that if you’re using a credit card for a specific purpose, such as rewards points, then this may be impacted if you switch to a balance transfer card.
Bessie Hassan is a money expert at Finder.
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