In my early 20s I was a debit card kind of guy. I’d save what I could, and frowned at the thought of borrowing money that I didn’t have on plastic, to pay for goods and services I didn’t need. I also (mistakenly) believed that applying for a credit card would be harmful to my future credit score.
While ‘credit score building’ wasn’t taught in school, I knew some people had better scores than others. I also vaguely understood that creditworthiness was important to get a decent mortgage.
Now I’m more financially astute, I appreciate that credit cards have a lot of other uses besides giving free and easy access to cash.
But what about that relationship between credit cards and credit scores? Is that still a legitimate concern? Will applying for a credit card negatively impact your future creditworthiness?
Let’s take a look at how credit scores work, and what happens when you make an application.
What happens to your credit score when you apply for a credit card?
Every time you apply for a credit card you must undergo a credit search. These searches are deemed either ‘hard’ or ‘soft’.
Hard searches are more common when you make an application for credit. If you undergo a hard search as part of a credit card application then it will show on your credit file.
Other lenders will be able to see this later. They will know you made an application for credit on a particular date.
A ‘hard’ search is logged even if you aren’t looking to borrow money. For example, you may just want to apply for a credit card to earn cashback or rewards on your everyday spending.
Soft searches, on the other hand, are more lenient. Only you can see soft searches on your credit file. Lender’s can’t.
Soft searches are rarer than hard searches. They mostly apply to current account applications. And even then, many current account providers still require applicants to undergo a hard search.
Hard searches aren’t all that concerning
Now for the good news. While hard searches may seem scarier than soft searches, they aren’t really a big deal.
Yes, hard searches leave a visible mark on your credit file. But they aren’t recorded forever.
Most hard searches will drop off your credit report after a year, according to the credit reporting giant Experian.
With this in mind, if you applied for a credit card over a year ago, it will probably no longer have any impact on your future creditworthiness.
Even more importantly, visible marks on your credit file DON’T give lenders any indication on whether you’ve been accepted for a card.
If you’re rejected for a credit card, you needn’t be embarrassed that other lenders will be able to see that another lender has shown you the door.
It’s still worth minimising the number of credit applications you make
Even though most applications for credit are removed from your credit file after a year or so, it’s a bad idea to apply for credit cards like there’s no tomorrow.
Remember, any credit applications you make do remain visible on your file for up to a year.
So if you make multiple credit cards applications in a short space of time, lenders may get the idea you’re in dire financial straits and are desperate for cash. This can paint a picture that you’re irresponsible with money, and therefore less likely to repay anything you borrow.
In other words, make several credit card applications in a row and there’s a high chance you’ll find yourself in a rejection spiral.
If you are ever rejected for a credit card, it’s best to take a step back and properly assess which cards are most likely to accept you, before you continue to make applications.
Card credit eligibility checkers can protect your credit score
Every credit card lender has its own acceptance criteria. Apart from a handful cards of that offer pre-approval before you even apply, lender’s borrowing criteria is often top secret.
And so you often won’t know whether you’re likely to be accepted for a card before you make your application.
This is where credit card eligibility checkers (or calculators) can be very useful.
Eligibility checkers enable you to enter your details and get a view on your chances of acceptance for various cards – without having to encounter a hard search.
Some of the better eligibility checkers – such as the one managed by MoneySavingExpert – also list cards that offer pre-approval.
If you’re pre-approved for a card then you’ll definitely get it if you go on to apply.
Credit file vs credit score: what’s the difference?
In simple terms, your credit file (also known as a credit report) contains your personal details, plus any past or present debts you have. It also details any missed debt payments.
Your credit score meanwhile is a figure that credit rating agencies have come up with, based on your credit file. Lenders may use this score when determining your overall creditworthiness – though each lender ultimately makes it own decision on whether to give you access to credit.
You have a right to access your credit report and score from any of the UK’s big credit rating agencies: Experian, TransUnion, and Equifax.
Getting a credit card can help your credit score
One of the biggest myths in personal finance is that using credit cards can only be harmful to your credit score.
In fact, the opposite can be true. A credit card may actually help boost your creditworthiness.
For example, if you have little or no credit history – which is typically the case for students or new graduates – then lenders won’t have much of an idea as to the likelihood of you managing credit responsibly. That is why students typically have mediocre credit scores.
If this applies to you, then one way of boosting your credit score can be to sign up for a specialist ‘credit card for bad credit’. Such cards often have low acceptance criteria, though in return, they come with enormous annual percentage rates (APR).
However, high charges shouldn’t be an issue if you fully repay your balance each month.
If you don’t think you can or will keep up with your repayments, then don’t get a card. Period!
But if you do get one of these specialist cards, spend responsibly, stay within your credit limit, and clear your balance each month, then you should see your credit score improve after six months or so.
We’re out of time to dive into the different ‘bad credit cards’ available. Honestly, there isn’t much to choose between them. But two popular brands to begin your research are Marbles and Capital One.
Do you pay any attention to your credit score? Is there anything I’ve missed above? I’d love to hear your thoughts in the comments section below.
“In my early 20s I was a debit card kind of guy.”
In my early 20s debit cards hadn’t been created. There were various types of cards or vouchers for extracting cash from ATMs. But if you wanted the convenience of plastic for purchases in shops or restaurants, credit cards were your only choice. They also doubled as cheque guarantee cards if they were issued by your own bank. Fortunately in those days you didn’t qualify for a mortgage by building up a credit score via borrowing, but rather by saving hard with your building society of choice.
It is rather quaint to remember that when Barclaycard, the first mainstream British credit card other than the chargecards Diners Club and American Express, launched in 1966 it was also only a chargecard and had to be paid off in full each month. It was only after a year or two the facility for ‘extended credit’ was quietly introduced on an unsuspecting British public. I believe that by the time the other banks jointly launched Access a couple of years later, the concept of credit on credit cards had been firmly established as its slogan was ‘take the waiting out of wanting’.
I would only add to this that there isn’t one single ‘credit score’ for UK individuals agreed upon by CRAs. Each will generate individual scores for you, aside from whatever internal scoring the lenders may apply.
If you access the services for Experian, Equifax and CallCredit you will get different scores from each. The article doesn’t necessarily make that sufficiently clear.
Before applying for a credit card I always look on my “credit club” account with Moneysavingexpert which is a kind of frontend for Experian.
This shows credit cards offers and will give you what they believe is your % chance of a successful application.
Some will even be “pre-approved”.
Soft searches are actually much more common than hard searches (in general) these days. If you look at your credit file you’ll often see them on there when you do credit card eligibility checking, or when you’re surfing for cheaper car insurance. The Credit Club that Adrian mentions above (a great resource by the way for anyone who doesn’t have it) also requires a soft search.
On your point about lenders not knowing if you were accepted, that’s broadly true, though if you have 3 applications with hard searches in the last 12 months but no new accounts set up, that is a pretty good indication you’ve been declined. Whether any lenders actually try to use this info, or just trust their own credit scoring, is anyone’s guess!
I, like thousands of others, will be made to re-apply for a credit card shortly if I we want to retain a John Lewis card. My circumstances have changed since becoming FIRE a couple of years ago, with my income being about the same as my outgoings (just as planned). I would expect any credit lender to reject my application so I don’t think I’ll bother with it. Why they couldn’t just transfer their customers with a good track record to the new card provider is a mystery. Another own goal from John Lewis, alienating their once loyal customer base.
@Nimbus – lenders in general won’t have much of a view of what your disposable income looks like on a credit card application. In my experience, affordability checks on credit cards are pretty light touch. If you still want to keep the card I imagine you’ll be able to as long as your credit file looks decent enough, regardless of your income/expenditure position.
@Mark (6) I believe Nimbus (5) is right to be wary of making a new credit card application now that he is FIRE. I agree with you that they probably will take little account of disposable income in considering an application, but they will look at gross income. If this comes from pensions and annuities, no problem. At a pinch dividends and interest may also satisfy them to a degree. But if Nimbus’s prime source of income is from drawdown of assets, I suspect this is less likely to satisfy a credit provider.
@David – I’m not sure specifically how NewDay (the new John Lewis card backers) underwrite credit cards, but in my experience the source of income is not usually delved into much by lenders. Essentially they just take the gross figure you input in the application and use that. You probably won’t even have the option of telling them where the income comes from on the application. Were it a mortgage, affordability is assessed in a much stricter way, and has to be evidenced usually – less so for unsecured debt generally.
I get upset about credit scores. Not because mine is bad but because it is a violation of privacy. I don’t want my personal and financial details being shared 24/7 in this way. If that makes applying for credit slower and less convenient then fine.
I was not aware that Hard searches only affect your credit for one year, thats good to know. We plan on getting a credit card for our daughter as soon as they will give her one, just so she can build up a credit file. It’s very important! Great post!