Paying off a credit card is just the start…

Paying off a credit card

If you have credit cards or overdrafts and are generally paying off the balances, well done!

But … there’s much more you can do to boost your credit score and chances of getting the best possible rates on credit

Keep an account open

Using a credit account shows lenders if you can afford to repay a loan. Also, good credit card behaviour helps improve your credit score. Likewise, a track record of borrowing and successfully repaying, for example, a credit card is worth keeping. Because of this, be careful when closing accounts.

You might be tempted to spring clean your finances and close older accounts. Surprisingly, this can have a negative impact on your credit score. It reduces the number of ‘reference points’ a lender sees when considering your application for a loan. If these ‘reference points’ are worth keeping (e.g. a credit card with a zero balance) don’t close the account.

Long-term accounts matter

For credit scoring, a recently opened account might not be worth as much as an account you’ve had for 10 years. Closing down an old account may reduce your score because the average time you’ve had all accounts will fall.

Keep your credit cards unused but open

Keeping open an unused credit card helps with your credit ‘utilisation limits’. These are the proportion of credit card limits you are using.

For example, a credit card with a £1,000 balance and a £10,000 limit represents a utilisation limit of 10%.

Top tip: higher limits and lower the balances really help your credit score.

Lenders assessing your application are more likely to provide a loan if they see you’ve got access to credit but haven’t been using it.

As an illustration, if you have three credit cards with a £3,000 limit on each card, the total available credit is £9,000.

If one of these cards is unused, its ‘utilisation ratio’ is 0%. That’s good for your credit score in itself. However, the benefit goes further.

If you’re using 25% of the limits on the other cards (£750 per card out of a £3,000 limit) this is £1,500 out of £9,000. A utilisation ratio of 16%. In the event that you closed the account with a zero balance your available limits fall to £6,000. Because of this, the £1,500 you owe increases the utilisation ratio to 25% (£1,500 of £6,000). Accordingly, this can drive down your credit score.

Savings accounts

Closing a savings account will have no impact on your credit score because it is not a credit account. Unless there’s a line of credit (and mobile phones are a line of credit) accounts do not show on your credit file and will not impact your credit score.

About Adrian Davies

With a background in money advice, Adrian's been campaigning for fairer finance for 25 years.

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