How do credit cards work?
A credit card allows you to borrow money to spend on the spot. You’ll typically have topay back whatever you’ve spent monthly. Your spending limit is agreed on in advancewith the lender, as is the rate of interest on any money that you owe if you don’t payoff the balance. There are differenttypes of credit cards available.
Advantage: Protection
Under Section 75 of the Consumer Credit Act, the credit card provider will have theresponsibility of making sure that you’re reimbursed if you don’t get what youpaid for. For example, say you paid for a television using your card, and the company thatyou bought it from goes bust before you receive it – your provider should make sure that youget your money back. This typically applies for purchases between £100 and £30,000.
Disadvantage: Cash withdrawals
You may incur a charge whenever you use your credit card to withdraw cash, whether locally orabroad. This includes the use of ATMs and may extend to other uses, including buyingtravellers’ cheques and making payments to other accounts. Withdrawing cash (alsoknown as a cash advance) from a credit card can have a negative impact on your credit score.Lenders may look at this unfavourably as it can be an indication of poor money managementespecially if there are multiple cash advances in a short period of time.
There are other potential advantages and disadvantages of having a credit card. You can viewsome of these here.
Credit cards and your credit rating
You’ll be expected to make monthly repayments on your credit card spending, includingthe minimum monthly amount charged by your provider. It’s important that you rememberto pay this off as missed payments could affect your credit history – this could impact yourability to obtain credit if you’re planning to borrow money.
Having a credit card could be useful in helping you to obtain credit – if you use it enoughand make your repayments on time. This shows lenders that you’re able to makerepayments on credit repayments promptly, which could help boost your creditworthiness whenyou’re applying to borrow money, such as for a loan or mortgage.
Having a credit card and showing that you can use it responsibly might help toimprove your credit rating, if it’s poor. You may want to be aware, though,that your credit history will be assessed by the lender when you’re applying for acredit card – a good rating will typically help your application, and give you a chance atgetting better interest rates.
If you’re planning on applying for a credit card, you may want to view your Equifax Credit Reportand Score beforehand – it’s free for the first 30 days, then £14.95 monthlyafter that. The report will let you see if there’s anything in your credit historythat should and can be improved, while your score will give you an indication of yourcreditworthiness.
This article was updated in April 2021; all information was correct at thetime of writing.
FAQs
Credit cards can help or hurt your credit score depending on how you use them. Paying your credit card bills on time each month is the best way to build a strong credit score. Paying late or missing a payment can lower your score. It's also important not to owe too much on your cards at any given time.
How do credit cards work? ›
Credit cards offer you a line of credit that can be used to make purchases, balance transfers and/or cash advances and requiring that you pay back the loan amount in the future. When using a credit card, you will need to make at least the minimum payment every month by the due date on the balance.
How does credit card debt affect credit rating? ›
It depends. If the minimum payment covers all or most of your monthly balance, then it's unlikely your score will be affected. However, if you've used a large proportion of your credit card limit, and you're consistently making only the minimum repayment, lenders may believe you're struggling to repay the debt.
Will a work credit card affect my credit score? ›
Some issuers may run a personal credit inquiry if a corporate card is being issued to you specifically, which could lead to a small and temporary hit to your personal credit score. However, the company's corporate card activity will likely not impact your personal credit score.
How many points does your credit score go down when you get a credit card? ›
To avoid this, experts recommend waiting about three to six months between applications for a loan and a new credit card. How much does your credit score drop when you open a new credit card? Opening a new credit card should decrease your credit scores by just a few points—usually around five to 10 points.
What happens if I use 90% of my credit card? ›
Helps keep Credit UtiliSation Ratio Low: If you have one single card and use 90% of the credit limit, it will naturally bring down the credit utilization score. However, if you have more than one card and use just 50% of the credit limit, it will help maintain a good utilization ratio that is ideal.
What is the number 1 rule of using credit cards? ›
Pay your balance every month
Paying the balance in full has great benefits. If you wait to pay the balance or only make the minimum payment it accrues interest. If you let this continue it can potentially get out of hand and lead to debt. Missing a payment can not only accrue interest but hurt your credit score.
What happens if I don't use my credit card? ›
If you don't use your card, your credit card issuer may lower your credit limit or close your account due to inactivity. Closing a credit card account can affect your credit scores by decreasing your available credit and increasing your credit utilization ratio.
What is the biggest factor affecting your credit? ›
Payment History: 35%
Your payment history carries the most weight in factors that affect your credit score, because it reveals whether you have a history of repaying funds that are loaned to you.
Is it true that after 7 years your credit is clear? ›
In general, most debt will fall off of your credit report after seven years, but some types of debt can stay for up to 10 years or even indefinitely. Certain types of debt or derogatory marks, such as tax liens and paid medical debt collections, will not typically show up on your credit report.
Be aware of any convenience fees you'll incur by paying your bills with credit cards. It's best to use credit only for products and services that won't charge a fee, and using cash, debit or bank transfer for the rest. And, of course, use a credit card only if you know you can pay off the balance each month.
Is a 900 credit score possible? ›
While achieving a CIBIL Score of 900 is technically possible, it is extremely rare. Scores above 760 are considered very good or exceptional, providing significant benefits such as lower interest rates and higher chances of loan approval.
Will my credit score go up if I get a job? ›
Your employment status isn't a factor in your credit score and won't impact your credit in any way.
What is a good credit score? ›
For a score with a range between 300 and 850, a credit score of 700 or above is generally considered good. A score of 800 or above on the same range is considered to be excellent. Most consumers have credit scores that fall between 600 and 750. In 2023, the average FICO® Score☉ in the U.S. reached 715.
Do credit card companies know if you lose your job? ›
"It's best to address the situation head-on," Dunn says. "It's only going to make it worse if you don't answer the phone (and) don't tell creditors you lost your job. You have a hardship. They're not going to know."
How much will accepting a credit card affect my credit score? ›
According to FICO, a single hard inquiry will typically knock fewer than five points off your credit score. That said, inquiries remain on your credit report for two years, and if you apply for more than one card in a short period of time, those multiple inquiries can have a compounding negative effect.
Is 7 credit cards too many? ›
So, while there is no absolute number that is considered too many, it's best to only apply for and carry the cards that you need and can justify using based on your credit score, ability to pay balances, and rewards aspirations.
How often can I apply for a credit card without hurting my credit? ›
It's also a good idea to wait at least 90 days between new credit card applications —and it's even better if you can wait a full six months.
Why did my credit score drop 100 points after opening a credit card? ›
New credit applications—like those for credit cards or auto loans—can have an impact on your credit scores. That's because a new credit application generally creates a hard credit inquiry, which can cause your credit scores to drop by a few points.
