Everyone has heard of a credit rating, but not everyone understands exactly what it is. Your credit rating is very important when it comes to borrowing money. If you want to buy a new car and you have a good credit rating, you will have absolutely no problem in getting a loan. Conversely, if you have a poor credit rating you may well be leaving the car yard without the car!
Your bank, credit union or finance providers like Dreamloans will check your credit rating before they approve your loan, so it’s a good idea to find out about your credit rating and how it can be damaged. Most people understand that they can harm their credit rating by failing to make loan repayments, but there are other more subtle things that can negatively affect your credit score.
Applying for Lots of Credit
If you apply for too many credit cards too quickly you will send a negative message to credit providers. Every single time you apply for a credit card the lender will carry out an enquiry on your credit file. Every enquiry is noted on your credit score. This information is retained so that credit providers can be alerted if someone is trying to open lots of credit accounts. A person who is seen to be doing this is considered more of a credit risk. The fewer enquiries made for credit the higher your credit score will be. So, before you apply for a new store card (yes, a credit enquiry will be made for a store car) consider how long it has been since you last applied for credit. Remember every enquiry will impact your credit rating. The same applies if you are applying for a mobile phone plan, so be aware.
Cancelling credit cards can lower your credit score. What happens when you cancel a card is that the account is removed and with it your payment history. When you have a credit card and make regular repayments, even if they are only the minimum payment, your credit rating will reflect the fact that you are reliable. When you cancel a card this history of reliability is gone. It is better to keep your credit card going and use it occasionally to make a small purchase and repay it on time. This will build your credit rating.
The other aspect to closing your accounts is your utilisation score. The higher the amount of available credit you have the better you look. For instance, say you have two credit cards: one has a credit limit of $10,000 and it has a balance of $4,000; the second card has a limit of $10,000 and also a balance of $10,000. The bank sees that you have utilised $6,000 out of a total of $20,000, which means you have utilised only 30% of your available credit. If you were to close the second card, you would then be utilising 60% of your available credit, so your credit position would not appear as strong.