Unused credit cards and overdrafts

Fryy

There seems to be so much myth and urban legend around credit ratings.

One one hand, people say you should close them if you don't need them, as it shows you can get into debt. On the other, people say it shows you're responsible and the bank trusts you. Some say using cards shows you have a credit history, others say that's no matter than not needing a credit card.

Does anyone actually know for sure? Should I close the overdrafts and credit cards I don't use? Or should I use them and repay in full and on time in order to actually build a credit history and actually boost my rating?

GingerBob_3

Fryy wrote: »

There seems to be so much myth and urban legend around credit ratings.

One one hand, people say you should close them if you don't need them, as it shows you can get into debt. On the other, people say it shows you're responsible and the bank trusts you. Some say using cards shows you have a credit history, others say that's no matter than not needing a credit card.

Does anyone actually know for sure? Should I close the overdrafts and credit cards I don't use? Or should I use them and repay in full and on time in order to actually build a credit history and actually boost my rating?

Credit reporting is a black art and is unregulated, so no one really knows the answer. For my part, I keep a substantial number of credit cards open, even if I don't use them. It has never affected my ability to obtain credit.

HappyMJ

Fryy wrote: »

There seems to be so much myth and urban legend around credit ratings.

One one hand, people say you should close them if you don't need them, as it shows you can get into debt. On the other, people say it shows you're responsible and the bank trusts you. Some say using cards shows you have a credit history, others say that's no matter than not needing a credit card.

Does anyone actually know for sure? Should I close the overdrafts and credit cards I don't use? Or should I use them and repay in full and on time in order to actually build a credit history and actually boost my rating?

You do need a credit history so using at least one card is good.

You also need to not appear to have maxed out your credit limit so you might need two or three cards to spread out any spending.

You don't though want access to vast amounts of unused credit. I do have £27,000 of credit card limit which I really must reduce as I'm sure that affects my made up score on Noddle.

Clearscore gives suggestions to improve the "score". One of them is "Your oldest credit agreement is not that old" so you might want to keep the oldest card for no other reason than to improve your "score".

Fryy

So I should actually use my credit card (very slightly) and always pay it off? Same for overdraft?

Is it bad to have lots of current accounts at the same time (all in the black)?

Not to be rude, but how do you know this? Because like I say, there appears to be a lot of conflicting information out there.

lisa110rry

Fryy, with regard to unused overdrafts, I have a little personal experience to share with you. Once upon a time (over 12 years ago), I wanted to buy a personalised number plate for my son in lieu of a car (at his request) from a bequest I received from the States. To make sure I could pay on the day of the auction, I requested my overdraft was put up to £7,500, which was agreed. In the end I didn't need it and never used it, ever, as the bank transfer from the US was completed in time.

Years later, and working abroad, I felt that having such a large unused overdraft could be dangerous (fraudsters, etc.) so I asked the Bank to bring it down to £1,000, also never used. However, I was advised by the bank that this would show as a credit check on my account! (Natvest) Maybe best not to close everything at once?

Ben8282

You are asking if you 'should' do something, but for what purpose? What are you trying to achieve and why? (Please don't say to improve your credit score.)

I most certainly would never consider reducing the overdraft facility on my main current account. Overdraft facilities tend to be related to income/account turnover so having a large overdraft facility on a current account would be an indication of high income/account turnover.
Remember also that it will not be apparent that it is you and not the bank who reduced it.

In an ideal situation:
Overdraft to remain UNUSED at all times. Using and repaying an overdraft every month looks bad; less bad then using and not repaying every month but bad nevertheless.
Credit cards should be used and REPAID IN FULL (except for cards with 0% balances).
If you have so many credit cards that actually using them all would be inconvenient, then by all means cancel the ones that you will never use again. Otherwise, keep them.

Also remember. It is very easy to reduce/cancel. It is not always so easy to get back later.

Fryy

Why is it a stupid question to ask what I should do in order to improve my credit score?

Moreover, notice how your comment is in complete contrast to a previous one on this thread alone? How does anyone know who to believe with regards to improving credit scores? There is so much conflicting information around.

eg., Is it good to have an overdraft but never use it? Same for credit cards. Is it better to use it (and build a history of paying your debts) or to never even have debts in the first place? Why is using a credit card good, but using an overdraft bad?

Is it the case that using an overdraft is bad because it shows your savings actually have run out on that account? Whereas using a credit card isn't bad because that does not imply anything about your actual savings (especially if you pay it off in full before any interest rate charges occur)? And reducing an overdraft is bad because they won't know if it was by choice? Is this all correct?

But why is having an unused credit card bad?

Also, are dips in credit score due to multiple searches temporary?

really?

I personally think there is a line between too much credit and not enough credit and you should assess where that is for you because surely this is relative to an individual an their salary/ disposable income.

Fryy

This is what I'm concerned about though.

I have no clue where the line is, or how to tell if I'm doing it right. I'm totally blind. It's frustrating as well because I am financially comfortable, yet because I have no idea how credit scoring works, my credit score could be bad because I am not using my credit card/overdraft properly.

Eg. some people say you should get a low credit utilisation ratio. But if I don't use my credit card at all, surely my ratio is 0? As low as possible? But apparently not using it is bad, but other actually say it's good?

Basically, I need to know how the algorithms actually work, because I'm afraid of taking one piece of advice that contrasts another. I at least need to know which advice to trust.

Ben8282

Fryy wrote: »

Moreover, notice how your comment is in complete contrast to a previous one on this thread alone?

My comment is in complete contrast because the author of the previous post has security concerns related to a large overdraft facility not shared by myself and in no way relevant to the subject under discussion.

Nebulous2

Fryy wrote: »

One one hand, people say you should close them if you don't need them, as it shows you can get into debt. On the other, people say it shows you're responsible and the bank trusts you.

Both of these can be true at the same time! In life you will often come across two competing rules / guides where you have to make up your own mind where to draw the line.

The problem is you are looking for absolutes where none exist.

You need to think about what you want to achieve and how important it is. Why are you trying to improve your credit record? Do you feel an urge to borrow coming on? How important is your need for credit? Enough to make substantial changes to your habits to improve your credit history?

I have often had credit card limits in the order of twice my salary. When I began reading MSE I saw that people didn't think that was a good idea so I closed some unused ones. My limits have crept up again but I no longer care.

Why don't I care? Because I'm in a stable job, rarely use credit, have been in the same house for years and have no plans to buy anything large where I would need credit. Lenders throw credit at me unasked for.

If I had a history of struggling to pay bills, was looking to buy a house and was having difficulty making the deposit I would be prepared to spend time and effort improving my credit history.

My unused credit limit wouldn't be the reason I was struggling to get the mortgage though. The low deposit and the signs I had been struggling with possibly missed payments would be.

So I believe a lot of what is being discussed in this thread is tinkering around the edges, rearranging the deck chairs. The real issues for many people are the iceberg and the hole below the waterline.