Got credit card, what next?

camaj

Just got my first credit card in 20 years, hopefully I can start to rebuild my credit history. The MSE guides seem to be a bit vague on what I should do next.

It does say use your card and pay it of every month. This might be a stupid question but what shows up on your credit file? Does it show how much you spent each month and whether you repaid it? Does it simply show that you've got no debt outstanding?

According to Experian (phone) accounts with an average age of 33month or more help you? Would it help if I cancelled contracts less than 33 months old, thus improving the average? I probably will anyway but it seems like quite a harsh reason to potentially reject someone for.

Sncjw

Credit score means nothing.

Buy stuff on card and pay when the statement comes through by the required date on the statement and in full.

My credit file shows who I have it with and how much on the card and if I've paid it

Anthorn

The "pay it off every month" bit applies to high interest cards to avoid ... er ... high interest. Credit card virgins will find managing the card a lot easier if they use it as if it were a charge card for everyday purchases and clear the balance every month.

Note that you don't necessarily need a credit card to build or rebuild a credit history. All credit which is reported to the CRAs count. That could be your bank account, landline phone and broadband, mobile phone contract, energy, mortgage and even your rent.

Lastly, if you do the same thing with your card every month you will be creating a pattern which will be used by lenders to build your financial profile.

Chappaz

Pay off the full balance of every statement when it's due. You don't actually have to do this (you can just make a minimum required payment), but if you leave a balance then it starts to accrue interest charges (which are gigantic on most starter cards). If you want to use a credit card to build your history without spending a penny on debt, then pay it off in full when due.

Also, try not to use too much of the credit limit on a month-to-month basis. Lenders also look at credit utilisation (i.e. how much of your available credit you use), and if they see that you're using too much of what you have available, it can indicate that you're in a spot of financial bother.

The general rule of thumb is to keep it under 30%, so if you have a card with a £1,000 limit, avoid having more than a £300 balance on the card at any one time.

Fromthebrink

Hi there,

I'm in exactly the same situation rebuilding after a bad few years. Chappaz's 30% rule of thumb comment seems both reasonable and sensible.

I am going to use mine as a coffee stop/services charge card for when I'm on the road for work. I have a debit set up to clear the amount in full the day after my salary hits my account.

Good luck on your rebuilding journey!

[Deleted User]

Fromthebrink wrote: »

I have a debit set up to clear the amount in full the day after my salary hits my account.

You might want to alter that, to pay it by the due date.

If you use a fixed date such as payday, you may end up missing a payment as statement dates shift.

Fromthebrink

Hi zx81,

Thanks for that tip, much appreciated. I will be keeping a very close eye to the point of obsession!

Cheers, J

Anthorn

Chappaz wrote: »

The general rule of thumb is to keep it under 30%, so if you have a card with a £1,000 limit, avoid having more than a £300 balance on the card at any one time.

Can you please provide a link to that general rule of thumb? I'm asking because I haven't heard of that before and it's interesting

What you are referring to is the ratio of balance to credit limit known as credit utilisation. But as far as I know that has never been defined.

Chappaz

Anthorn wrote: »

Can you please provide a link to that general rule of thumb? I'm asking because I haven't heard of that before and it's interesting

What you are referring to is the ratio of balance to credit limit known as credit utilisation. But as far as I know that has never been defined.

VantageScore (the credit model shared by a few agencies) recommends it:

http://www.experian.com/blogs/ask-experian/how-utilization-rate-affects-credit-scores/

As do Equifax:

https://blog.equifax.com/credit/how-credit-cards-affect-your-credit-score/

There won't be a specific rule which applies to all as every lender obviously has different criteria. It's also certain that it will be a sliding scale (so 31% won't cause a sudden drop compared to 30%).

However, to be on the safe side, I'd say 30% or below is best. Some lenders probably won't bat an eyelid at even 40% or 50%, but it keeps it conservative so even the strictest lenders won't see the credit utilisation as an issue.

camaj

Chappaz wrote: »

The general rule of thumb is to keep it under 30%, so if you have a card with a £1,000 limit, avoid having more than a £300 balance on the card at any one time.

Thanks. What counts as balance in this sense? If I spend £500 and pay it off at the end of the month would that be £500 or £0?

I don't need a credit card and I'm only using it to help with my file. I'm wondering if it'll help if I never use it or spend next to nothing, obviously that's under 30% but on the other hand if I never borrow anything it doesn't demonstrate that I'll pay it back either. I'd also happily spend more if it was useful.

From your first link it seems like not spending is a good thing because you'd have no balance and thus a 0% utilisation:

But, don’t expect paying in full to lower your utilization. The balance reported is the amount owed when you receive your billing statement. The only way to have a zero balance is to not use the card for an entire billing cycle or pay the balance well before the due date so that your billing statement will show a zero balance due.

The first sentence concerns me. I wonder if they mean to say "Don't expect paying in full to lower your utilization immediately" presumably it'd lower it if you didn't use it for a month?


The second link seems almost contradictory:

Having a card and not using it will not help you build your credit file.

Which seems to support my theory, yet it would lead to higher utilisation. Perhaps utilisation is treated equally as long as it's under 30%. Maybe the sweet spot is somewhere close to 30% but not over it so you can demonstrate ability to pay but also that you're not in financial difficulty.

Chappaz

camaj wrote: »

I don't need a credit card and I'm only using it to help with my file. I'm wondering if it'll help if I never use it or spend next to nothing, obviously that's under 30% but on the other hand if I never borrow anything it doesn't demonstrate that I'll pay it back either. I'd also happily spend more if it was useful.

From your first link it seems like not spending is a good thing because you'd have no balance and thus a 0% utilisation:

Not using the card is pointless. The whole point of getting the card is so lenders see a stable history of you using credit and then paying it off on time. Every on-time payment is a positive mark.

30% is the rough maximum limit. You don't need to aim for any particular amount. There's no sweet spot. They just want to see that you aren't using huge amounts of the credit available as this may indicate financial difficulties. Spend 10% or 20% if you like. Just don't go too high, that's all.

Last year I had an Aqua card with a £600 limit. 30% of that is £180, so certain months my balance was £120, other months it was £50, others it was £30 or £80. I just made sure that I never went above £180.

Obviously there are limits. I wouldn't recommend spending £1 per month and paying that off in full as it's quite obvious what you would be trying to do.

Just keep it natural and don't over-think it. All you need to do is spend at least once or twice in between statements so there's always a balance due with every statement, so you then have the opportunity to pay it and then show another successful on-time payment to add to the list in your file.