Having a good credit score can be so important for many people. With a good credit score, you will be more likely to qualify for loans such as a mortgage, and make larger purchases like a house.
However, there are a lot of things that can negatively impact a credit score, and you can be docked points. This can mean that it is much harder to get a loan, which many people rely upon to live.
For instance, things like late payments, applying for more credit and canceling credit cards can all decrease your overall credit score. So, what exactly is a credit score and how does it work?
In the most basic sense, a credit score is a number between about 300 and 850 that conveys a consumer’s worthiness of credit.
The higher the score, the more worthy the consumer is, and the more likely they will be offered credit. This is because the higher the score, the better the person is at making payments, and the more reliable they are for potential lenders.
When you apply for a loan or a credit card, banks will do what is called a hard check, where they will research your credit history and find out your credit score, to see whether you are suitable for the line of credit they are offering.
Your credit score is based upon a few things, such as whether you have outstanding debt, how many levels of debt, your credit history, number of open accounts, your repayment history and many more factors that can impact the score.
Whilst you can build your credit score over time, you can also drop points through a variety of ways. For instance, you may notice that your credit score dropped after applying and receiving a credit card.
When you open a new credit card, you may notice that your credit score has lost a few points. This is because opening a new line of credit will ding your score a few points.
This typically happens because when you apply for a credit card, the card issuer or lender will review your credit information and do a hard check, or a hard pull of your credit history.
Whenever you undergo a hard check, you will lose a few points, as you are applying for credit. This happens whether you are approved or not for the credit card. This is often because people may apply for multiple credit loans from a variety of sources, and have to undergo multiple checks.
Whilst having a new credit card will decrease your credit score a little, this is usually only temporary, as you can use your credit card to build up your credit score, as long as you use it responsibly.
After having your credit card for a little while, your score will actually go up and increase. So, how long does this usually take? Well, to see an increase in your credit score you will have to pay off your balance, or pay off the minimum balance every month, on time.
Once you have done this for a few months, or once you have completely paid off the balance, you will soon see an increase in your credit score. However, this will take a few months, as it will take a couple of billing cycles to reflect on your credit score.
This is largely due to the fact that credit card companies will send monthly updates and statements to the major credit bureaus at the end of the billing cycle. So, depending on where you are in your billing cycle when you pay it off, the payment may not be reported for a few weeks.
Once this has been reported, the credit card company will have recorded your new information, payment cycles, along with credit scoring models, which will update your credit history, and you will see a noticeable difference in your credit score.
Yes, you can use a credit card to build credit. If you use your credit card responsibly, by not using up all of your credit limit, by making payments on time, or by never paying fees or missing payments, you can improve your credit history and your credit score.
The best way to build your credit score with a credit card is to use it sparingly. If you maintain a low utilization rate, using the credit card for only a few things, and keeping the balance low, you can improve your credit rating.
However, improving the credit score will only work if you also pay your bills on time, or at least pay your minimum payment on time every single month. If you miss a bill’s due date just one time, you may be charged fees and you could lose credit points.
To avoid this, always set up direct debits or automatic payments with your bank account, to ensure that the minimum payment or the full balance is paid off as soon as possible.
You do not have to use your credit card every month to build credit, but it can be useful.
Nothing will happen if you do not use your credit card for a month, you just have to ensure that you are still keeping up the payments and balances if you still have some on there.
However, you should be using it every three to six months to keep building your credit score, maintaining the payments and writing off your balances.
If you do not use the card for a great number of months, it could be considered inactivity, in which case your credit score may drop again.