How do credit cards impact your credit score?

Having a good credit score is essential for being able to borrow at favourable interest rates. If you’re thinking of getting a credit card or already have one, see what impact it can have on your score.

Written by

The Editorial Team

Experts in personal finance, insurance and utilities

Posted

15 JUNE 2022

5 min read

How do credit cards affect your credit score?

Credit cards can affect your score in a number of ways, from applying for a card, to how you use it, to making repayments. Each of these things can play a role in how your credit score is calculated. Let’s take a look at each in turn.

Checking your eligibility for a credit card

When you apply for a credit card, the provider will carry out a hard credit search. This will leave a record on your credit file that other potential lenders can see. A lot of hard searches within a short time may affect your score.

To avoid leaving a record on your credit file, it makes sense to see how likely you are to be accepted for a card before you make a formal application. Our credit card eligibility checker can help you do this. It uses a soft credit search, which doesn’t leave a mark on your file or affect your credit score, to check which cards you’re most likely to be accepted for.

Applying for a card

When you apply for a card, the credit card provider will look at your credit record to check:

whether you’re reliable about paying back what you borrow
how much other credit you’re using
whether you’ve made any other credit applications recently
if you’ve been made bankrupt or have County Court Judgements (CCJs) against you.

This inquiry will show up on your credit report and might result in a slight drop in your credit score – but it shouldn’t have a substantial effect if you’ve made only one application for credit. The inquiry will usually stay on your report for no more than a year.

However, making multiple applications in a short space of time can be more of a problem, as it may give lenders the impression that you’re in financial trouble.

Getting a new card can also affect your credit score. Generally, the longer you’ve held credit accounts and managed them successfully, the more it will help your credit score. A new card will bring down the average age of your accounts, which may impact your score for a while. But the longer you hold the card, the less the impact will be.

See more on how to apply for a credit card.

Using your card

Ideally, you should avoid spending up to your card’s credit limit. This is because the amount of debt you have on your card affects your credit utilisation ratio. This is the term used to describe how much of the credit available to you that you’re using.

A ‘good’ credit utilisation ratio is considered to be under 30%. If you go over 50%, this can be flagged up on your credit report.

If you have other forms of credit, such as a personal loan, and you make repayments for both responsibly, it can show lenders that you can deal with different kinds of debt, which can help improve your score.

Making repayments

All payments on your credit card will be recorded on your credit report. Paying late is seen as a signal that you’re struggling to manage your finances. Late payments will stay on your credit record for six years, although their impact will lessen over time.

Some companies will take late payments into account when working out your score, so this may affect whether you’re offered credit and at what rate.

The best thing to do to avoid late payments is to set up a direct debit so that the minimum payment is made every month, or the bill is paid off in full if you can afford it.

Increasing your card credit limit

Your credit limit is set when your lender approves your card application. Over time, if you show that you can manage your account responsibly, your provider may increase it. Each provider has their own criteria for offering increases. It’s usually a sign that your credit is in good shape.

You can also ask for a credit card limit increase. This can be useful if you can afford the repayments and you know you have a large expense coming up that you want to pay for by credit card.

Increasing your limit will allow you to make larger purchases without raising your credit utilisation ratio. In the longer term, having a higher limit might give you a better score than frequently spending up to a lower limit.

Only increase your credit limit if you’re confident you can afford the repayments and won’t rack up debt that you find difficult to pay back.

Having more than one card

Credit cards are designed to work in different ways. For example, there are cards aimed specifically at people who want to make interest-free purchases or get rewards.

Having more than one card can maximise the benefits to you and increase the amount of credit you have available – and remember, the lower your utilisation ratio, the better for your credit score.

But having multiple cards can tempt you to overspend – and spending up to the limit on multiple cards could hurt your credit score. It could also be easier to miss payments with multiple cards, again negatively impacting your score. And it could make lenders wary of you maxing out on all your cards at once.

Keeping or closing cards with no balance

It may seem like a good idea to close a card you no longer use, but it could affect your credit utilisation, so may have an impact on your credit score.

If you’re working on improving your score, it might be a good idea to keep your old card and make some small purchases that you pay off in full every month, as this will show you can manage multiple cards responsibly.

However, if might make sense to close a card that has a high annual fee if you’re not using it. This might cause you credit score to drop for a short period, but it should rebound in a few months provided you continue to use credit responsibly.

See more on how to cancel a credit card.

Different scores for different credit agencies and card providers

Remember that every credit reference agency calculates your credit score in different ways and every card provider has its own way of evaluating the information in your credit file – along with the other information it has about you.

For example, you’ll be asked about your income when you apply for a card, but this isn’t recorded in your credit file. So a card provider will be considering affordability as well as your credit score.

To keep your credit score healthy, use your credit cards wisely and make sure you pay at least the minimum balance every month, on time.

Looking for a credit card?

Compare credit cards quickly and easily. Use our eligibility checker to find a credit card deal that suits you – and find out if you’re likely to be approved without it affecting your credit score.

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