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.
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.