A credit card plays a critical for your credit scores. Building credit is more about timely repayments and effective utilisation of your credit. That's how you get into the credit building game.
If you don't use a credit card at all, or have no credit borrowed, the credit bureaus and risk assessment agencies won't have anything to base your scores on. Once you apply for credit and get into the repayment process, only then do your credit scores come into play.
As mentioned above, the way you use your credit cards is a significant factor in your overall credit report. It is the easiest way for you to start building your credit score if you have never taken a loan or credit in the past, as they are a variety of small to high limit cards available as per your needs.
Going over your credit score will give you an idea of whether or not you're eligible for a credit card. There are three main credit reporting bureaus in the UK, namely Experian Equifax and TransUnion.
Each company has its own credit scoring model and defined standards for satisfactory score levels, as given below;
- TransUnion: It uses a scale of 0 to 710, with anything above 560 is considered good.
- Experian: It uses a scale of 0 to 999, with anything above 720 is considered good.
- Equifax: It uses a scale of 0 to 700, with anything above 380 is considered good.
You can either visit their websites and view your reports for a nominal fee after filling in your personal details. You can also use their partner sites to get a clear score app for free.
First things first, plan before applying for each credit card. Understandably, one would love to keep a variety of credit cards from different banks, as there are various unique offers attached to each. This makes it very enticing for you to have multiple cards in your wallet.
That's great, and you should totally go for it. But the only thing you need to refrain from is applying for too many cards in a given period. This reflects poorly on your credit reports as lenders start thinking you are relying on too much credit in a given time, thereby increasing your risk factor and decreasing your chances of getting a low-interest loan.
As a credit cardholder, you need to be familiar with the term called 'Credit Utilization Ratio'. This is the ratio of the amount of credit balance you have left to the total credit limit you have. To maintain a quality credit score, you should keep your utilisation ratio as low as possible.
There are different ways of keeping the utilisation ratio low;
- Avoid closing credit card accounts: Avoid closing your unused credit card accounts as it helps in increasing the total credit limit accessible to you. This effectively drives down your utilisation score. The same is applicable for those accounts for which you've already paid the outstanding balances.
- Make bi-monthly payments: Another great way of keeping the utilisation scores down is to schedule bi-monthly payments for your credit card dues. Increasing payment frequency also attracts lower interest rates.
- Go for high-limit credit cards: Go for cards that offer limits higher than your actual needs, so that the utilisation ratio stays considerably low.
Secured credit cards are special cards that require a deposit that serves as collateral for the purchases you make using the card. If you default on your payments, the card issuer keeps your deposit. Otherwise, as long as the account is in good standing, your card issuer will return the deposit to you after the account is closed.
Getting a secure credit is a great option when you have bad credit, as they are readily available and don't require strict credit risk checks. The deposit amount takes the issuer's attention away from your risk.
This is a convenient way to start building your credit score, as the deposit amount remains safe even if you default on a few payments. It will hurt your credit score a bit, but you won't be hounded by debt collectors for sure.
Keeping an emergency fund to exclusively pay off credit card bills is a safe way to use credit cards for emergencies. You can use the card to pay for your critical needs and then immediately use your funds to start paying off the outstanding amount.
This way, you get benefits from using your credit card and don't have to risk defaulting large credit card payments. Emergencies can occur anytime, so it's best to stay prepared for them in a way that will keep you away from entering bad financial situations and also bring some rewards.
Prepaid credit cards are a great way of building credit scores if you have never taken credit, are a thin-file customer, or have a poor credit history. Prepaid credit cards are pre-loaded cards that you can use for a minimal monthly fee.
The card works like any debit card but acts like a credit card. So, using the card positively reflects in your credit report, as you will be regularly paying a monthly fee, which will act as repayment towards your credit card.
Pre-paid cards are also great if you want to be very strict about how much credit you take, and want to only spend the money you have.
So, if you want to build a quality credit score, it behoves you to have a credit card on file as every lender extensively relies on that data. Before you apply for a credit card, the first question you should be asking is, how to check my credit score? It is the fastest way of building a credit score and is easily manageable, as the limits and repayments are based on your specific needs.