Have you checked your credit score lately? Having a good credit score is an important step to getting access to better priced financial products.
A good credit score doesn’t just help if you apply for major financial products such as loans, mortgages or credit cards, it also counts towards gaining access to mobile phone contracts or favourable direct debit terms. And with a little discipline and a lot of motivation, you can use your credit card to your advantage and help yourself to a better credit score.
Treat your credit card like a debit card
If you are disciplined and a little pedantic, you can use your credit card instead of your debit card for most purchases. Whether you are paying for your groceries or paying the household bills, make it a point to use your credit card.
Here’s why: Each time you use your credit card, it’s like you’re taking out a small loan (and, after all, if you don’t pay it back, you are!). That means that when you pay off these purchases in full at the end of the month, you’re showing the credit-rating agencies that you are responsible with the credit that is available to you. Namely, you utilise your credit, and pay it back. Demonstrating this behaviour over and again should prove that you are a more reliable credit risk and worthy of a higher credit score.
The one potential trap with this strategy is that because you make purchases on your credit card, your bank balance doesn’t change to show what you’ve spent. It’s only when you pay the card balance off that money comes out of your current account. If you aren’t good at keeping track of your purchases, you could easily spend more than you can pay off. Only spend what you know you can afford to pay back, otherwise it defeats the purpose of using this approach.
Always pay your credit card on time
Payment history is the most important factor that’s considered in your credit score, so make sure to always pay your credit card bill on time, and in full. This will help you avoid negative marks on your credit score as well as avoid any late-payment fees on your next statement. Paying your credit card balance in full each month will enable you to get all the rewards and benefits of having access to credit without the downside of added charges. It will also prove to lenders that you are reliable when it comes to paying back debt.
Here’s a tip. When I pay for my fuel or groceries, I pay it on the credit card. When I get home, I immediately transfer the equivalent amount from my current account into my credit card account. With banking apps, this takes all of 30 seconds and is an easy way to ensure that I don’t overspend. Then I only have a small balance to pay off at the end of the month. And keeping my balance low also helps my credit score, as you’ll see in just a moment!
Keep your balance as low as possible
Constantly running a balance that is close to the maximum limit not only risks you potentially going over your credit limit and paying a charge, but also displays poor financial control to lenders. Just because your credit limit is £2,000, it doesn’t mean you should use all of it.
Lenders also look at a ratio that not many people know about. It’s called your credit utilisation ratio. It’s easy to work out – you just divide the balance owed by your credit limit. If your balance owed is £300 and your credit limit is £1,000, then your credit utilisation ratio is 30% (300/1,000). It is suggested that you try and keep this ratio between 30% to 40%, or lower. Go ahead and work out what yours is now and aim to keep your balance around this mark.
This ratio carries a lot of weight by the credit agencies when working out your credit score. Keeping this ratio as low as possible is one of the easiest ways to improve your credit score and show lenders you can be trusted with higher amounts. Applying the strategy that I outlined in the tip above can help keep your balance and ratio as low as possible.
Using credit cards can be a double-edged sword. Used wisely and with discipline, they can help you build a better credit score. Used foolishly, they can lead to high interest charges and a lower credit score. Be honest with yourself about your credit card behaviour and put in place the steps that will help you achieve a higher credit score.
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