Credit Building > Do credit cards affect credit score?

Do credit cards affect credit score?

Wollit Team5 minute read · Updated 29th June 2024

Owning a credit card does not directly affect your credit score, but the way you use it can. If you make repayments on time and stick to the terms of the agreement, using a credit card can help you build a credit history. This will show other lenders that you're a responsible, creditworthy borrower. However, a credit card can also hurt your score if you don't use it carefully.

How can a credit card hurt my credit score?

Credit cards can affect your score in multiple ways.

If you make too many credit card applications.

The first moment a credit card can potentially hurt your credit score is right when you apply for it.

That's because each application you make requires the card provider to run a so-called "hard check" on your credit file. This means that they will request—with your permission first—a copy of your credit report from one of the credit reference agencies (CRAs). Depending on who they work with, this can be Equifax, Experian, or TransUnion.

It doesn't matter whether you're accepted or not. Multiple hard searches on your credit report can signal to lenders that you might suddenly be struggling financially. Because of this, CRAs lower your credit score when you make many applications in a short time.

If you're late paying your credit card bill.

The second way a credit card can hurt your credit score is when you miss a repayment. Any time this happens, your credit card provider will report it to the CRAs they work with. Once reported, a missed or late payment stays on your credit report for six years and lowers your credit score—even if you eventually pay the card bill.

The impact on your credit score is even worse if you default and the credit card provider closes your account. According to Experian, a default can cost you as much as 350 points out of 999.

If you go near or over the credit limit.

The third way a credit card can hurt your credit score is when you rely on it too much. Your credit score will take a hit if you consistently max out your credit card – or worse, exceed the limit. The reason is similar to when you make too many applications: it makes lenders think you might struggle.

How can a credit card improve my credit score?

Using a credit card and paying your bill on time can show lenders you're good at handling debt. It can also improve your credit report and score in several ways.

It can build (or rebuild) your credit history.

If you have a "thin" credit file, are new to the UK, or are recovering from a past bankruptcy, a credit card can be a decent way to build your credit history. Of course, you'll need to manage repayments responsibly and be patient.

It can improve your credit mix.

"Credit mix" refers to the types of loans you have. Credit reference agencies and lenders like to see that you can manage different kinds of debt well, which is why your credit mix can make up about 10% of your credit score.

This means that adding a credit card is a good way to improve your credit mix and score if you only have a mortgage and a car on lease.

It can lower your credit utilisation.

"Credit utilisation" means how much of your total credit limit you use. So if a credit card has a limit of £2,000 and you're using £1,000, your credit utilisation is 50%. CRAs and lenders like to see a low credit utilisation ratio – it makes up about 30% of your credit score. Because of this, adding a credit card can be a way to spread your payments around so that your credit utilisation is lower. You'll be able to show that you're not using all the available credit, which suggests that you're not struggling financially and aren’t living on debt.

What are some myths about credit cards and credit scores?

Because of how many kinds of credit cards there are and how important they are to your credit score, you might have encountered a few myths. Here are some:

Getting your card application rejected will hurt your credit score. This is not true. Simply being rejected (or even accepted) for a credit card has no impact on your score. It's only the number of applications you make that affect your credit file.
Owning a credit card improves your credit score. That is not entirely true. On the one side, a credit card will increase your total credit limit, and lower your credit utilisation ratio. But if you rarely use it or if it's too new, then lenders will pay little attention to it – the credit card age and how often you use it is way more important.

How should I use a credit card to improve my credit score?

If you want a credit card to improve your credit score, you need to use it in a way that shows lenders that you're financially stable and a good borrower.

Use an eligibility checker and make fewer applications.

Too many credit card applications can hurt your credit score. This applies to credit cards and all kinds of credit agreements – from personal loans and mortgages to mobile phone contracts. This is why you need to use an eligibility checker first – these only run "soft searches" on your credit report, which are only visible to you and don't hurt your credit score.

You should also keep the number of card applications to a minimum. Experian recommends avoiding having more than two hard checks within six months.

Set a Direct Debit so you can pay your card bill on time.

Direct Debit can be a good way to avoid accidentally paying a credit card bill late. However, you'll still need to make enough money in your bank account to cover payments when they're due.

Make more than the minimum payment.

Making just the minimum payment on time each month might be tempting, but we recommend paying as much as possible. This will help you reduce your balance and the amount of any interest you pay overall. Otherwise, your pending payment will get rolled over to the next month, and additional interest will be charged. This will make it harder to catch up with repayments, increasing the risk of default and sending another red flag to lenders that you're struggling financially.

Don't max out your credit cards.

If you go over your credit card credit limit, in addition to fees, your credit score will also take a hit. Experian recommends that your credit utilisation ratio be kept under 25%. So, if your credit card limit is £1,000, try not to use more than £250 per month.

Keep your credit cards active if you can.

A credit card increases your credit limit and lowers your credit utilisation ratio simply by having it. When you close a credit card, you close down a line of credit available to you. This can then increase your credit utilisation ratio and lower your credit score.

This is why you should keep your credit cards open and active, even if it's just with a small recurring purchase, like a Netflix subscription or a gym membership.

Plus, old credit cards matter much more for your credit history: a card that you have been using for a few years will tell more about how you repay debt, and it will affect your credit score more than a card that you just got a few months ago.

Should I get a credit card to improve my credit score?

Credit cards can be an excellent credit-building tool. Some credit card providers specialise in cards only meant for building your credit history – these are called credit-building credit cards.

But before getting a credit card to improve your credit score, you should remember that many factors influence your credit score. How you use a credit card is just one of them. Others, equally important, are:

Whether you registered to vote,
How often you move your home and change your address;
How regularly you pay any other bills;
Even your spouse's credit history or any other person you might have a joint account with.

You should also be aware that credit cards, and especially credit-building credit cards for people with bad credit, come with some pretty big downsides:

Low credit limits, which can make it easy to max them out or even go over the limit;
High interest rates: A typical credit-building credit card charges between 30 and 60% per year, including fees. A regular credit card charges only 10-20%, which is still higher than most personal loans.
There is a high risk of missing a repayment. This can happen for many reasons, including if a fraudster gets your credit card details and makes a large purchase you can't afford to repay.

For these reasons, you might also want to look into other tools that can help you build your credit score:

Experian Boost: It can quickly boost your credit score by making regular payments to your savings account, council tax, and even streaming services like Amazon Prime or Netflix count towards your Experian credit score.
Wollit: Wollit is a credit-building app that reports your monthly subscription as a loan repayment to all three credit reference agencies (CRAs). This ensures that your credit score improves on all three CRAs (not just Experian) and also keeps you safe from costly defaults, credit card interest, and late payment fees.