Credit cards and credit score, how do they affect each other?
You may be wondering – does applying for a loan affect my credit score? Indeed, it does. Therefore, it is important to be a bit prudent when it comes to applying for a loan. When you apply to individual lenders yourself, they will each do a credit check on you. Meaning that each time you apply for a loan it will get marked on your file, ultimately reducing your score. However, the great thing about Personal Loan Pal is that we look at multiple lenders for you. We compare multiple lenders at one time but we only do one credit check. This is great for you for 2 reasons: firstly, because you don’t have to do any work looking for a lender for yourself and the second reason is that you only get one credit check marked on your file. Sounds great, doesn’t it? Find out about personal loan comparison here.
Another question people ask is does having a credit card affect my credit score? Again, the answer is yes. But your score can either be affected in a positive or negative way. How you use your credit card, if it is responsible or not, will determine how your score is impacted.
So how exactly, do credit checks work and how do credit cards and loan applications affect my credit score? Well, these are good questions to ask, so we wanted to put together a useful blog to clear things up. Here we’ll go into detail about credit cards and credit score, what affects them and particularly how loan applications affect them. We’ll also give you some advice on how to improve your credit score, as well as a credit cards and credit score glossary. So, read on for some juicy info.
What are credit checks?
Credit checks, otherwise known as credit enquiries, are when lenders look at your credit rating, which reflects your history with using credit. However, there are different types of credit inquiries. For instance, there are soft enquiries and hard enquiries. Soft enquiries can be when you want to obtain a copy of your credit rating and it doesn’t really have an impact on your credit score. Hard credit enquiries refer to when a third party makes an enquiry into your credit history. This will most often be a lender or credit provider.
What are loan applications?
Loan applications are types of credit enquiries. Which is when a lender makes an inquiry into your credit history and performs a credit check. However, there are various types of loan applications that can be considered as credit enquiries. For instance, there are home loans, student loans and car loans. Making multiple applications for these types of loans isn’t viewed as badly since for these types of loans lenders know you a looking for the best rates. Lenders can tell that you aren’t looking for multiple home loans, car loans or student loans. Whereas with personal loans, multiple loan enquiries could appear as though you are looking for multiple loans, and are desperate for money. This is when loan applications can severely hurt your credit rating.
How do loan applications affect my credit score?
Each time you apply for credit, the lender will perform a credit check to see whether your credit score is good or not. This will help them to decide whether they should lend to you or not. So, when you make a credit application it gets recorded on your file. One application doesn’t make much difference, but when you make multiple credit applications like this, it can hurt your credit score.
How long do loan enquiries remain on your credit score?
Any credit enquiries will remain on your credit file for 5 years.
How do credit cards and credit score work?
You may be wondering how exactly do credit cards and credit score affect each other. Well firstly, credit cards can impact your score in a good way or a bad way depending on how you use your credit card.
Credit cards and credit score negative – if you pay off your credit card balance late, or if you have multiple credit cards that have a high balance on them this will hurt your credit score.
Credit cards and credit score positive – if you pay off your credit card balance in full at the of the month this will demonstrate responsible use of credit cards and therefore improve your credit score
What else impacts your credit score?
Credit inquiries affect your credit score, but there are other factors that can have an impact too. Your credit score is composed of the following factors:
Your payment history – it basically means how reliable you have been with paying your bills. If you have been late with paying any bills it will have a negative impact on your account.
The amount of credit you use – this refers to the amount of credit you have available such as credit card limits versus how much you use.
History of using credit – a big part of your credit score is composed of looking at the length of your credit history. The longer you have been using credit responsibly, the better your credit rating will be.
The diversity of credit use – the diversity of your credit use will also have an impact on your credit score. If you use a blend of different forms of credit it shows that you can manage credit effectively.
Other negative info – unfortunately your credit report can contain various different other information in regard to your situation. For, instance any default account, bankruptcies or court judgements may be recorded on your credit file.
How long does other negative information stay on my credit report?
Not only do credit inquiries remain on your score for several years, other information can also remain on your credit file for 5 years. This includes any default payments, overdue accounts, court writs or any court judgements against your name. Information that stays on your report for 7 years includes overdue accounts that are considered serious credit infringements.
However, if you have any debt agreements or bankruptcies, they can stay on your account for a much longer amount of time, depending on the length of the term.
How can loans be beneficial to your credit score?
There is some good news! Yes, loans can be beneficial to your credit score. If you are reliable with making your payments on time, having a loan can demonstrate responsible use of credit. This can, in fact, increase your credit score. It means that in the future you are likely to get approved for a larger amount of credit.
How else can you improve your credit score?
Responsible use of credit with a loan can have a positive impact on your credit score, but there are other ways to build up your credit rating too. Here is a list of the simplest ways to improve your credit:
- Pay your bills on time
- Get a credit card and keep your balances low
- Dispute any errors on your credit file
- Build a strong credit age
- Limit your credit applications
What is a good credit rating?
Your credit rating will be a number between 0 and 1,200. The higher the figure means the better your credit rating is. An average credit score is between 510 – 621, and a good credit rating is anywhere between 622 – 725. A credit rating over 725 is considered very good.
How can having a good credit score impact you?
A bad credit score can have several negative impacts on you. That’s why it’s important to work towards having a good credit score. However, the benefits of having a good credit score aren’t taught to us in school. So not everyone knows how a good credit score can impact your life. So, here’s why it’s great to have a good credit score:
1. More likely to get approved for a credit card or a loan – when you have a good credit rating it demonstrates to lenders that you are trustworthy with your finances. It shows lenders that you will be reliable with your repayments and this is what lenders like to see.
2. Gives you more negotiating power on interest rates – when you have a good credit rating it puts you on a better standing foot to negotiate interest rates with lenders.
3. You can get approved for higher amounts – when you have a good credit rating, you can get approved for higher loan amounts than if you were to have a bad credit rating.
4. Get easier approval for rental houses and apartments – one of the things that letting agents look at when it comes to approving tenants for rental agreements is the strength of their credit rating. A good credit rating will indicate that you will be more reliable with your rental payments.
5. Better insurance rates – when getting insurance, having a good credit score means that you can benefit from better rates from insurance providers. Studies have proven that people with lower credit rates make more claims. Therefore, they’re charged higher insurance premiums.
6. Get a mobile phone contract without a security deposit – this is another great benefit of having a good credit rating. You are more likely to get approved for a mobile phone contract and probably won’t require a deposit.
How do I check my credit score?
The easiest way to check your credit score is to visit the website of an online credit bureau. Visit one of the following websites to get your free credit score:
- Credit Savvy – https://www.creditsavvy.com.au/
- Credit Simple – https://www.creditsimple.com.au/
- Get Credit Score – https://www.getcreditscore.com.au/
They will ask you to enter personal details such as residence and contact details as well as proof of identification.
Credit cards and credit score glossary
Credit – It’s the term given to when you receive money in advance that you can receive from a credit provider. It is a convenient way of paying for something in advance.
Credit card – A credit card is one way of obtaining credit. It is issued by a bank or financial lender.
Credit rating – This refers to the number given on a scale of 0 – 1,200 that measure the value of your relationship with credit. The higher the number the better your credit is.
Credit score – This term is the same as a credit rating. The two terms can both be used interchangeably and refer to the value of your credit history.
Credit file – This is a breakdown of the information that makes up your credit score rating. It is composed of the length of your credit history, personal details such as age and employment status and credit mix.
Credit report – Your credit report is simply another term for your credit file. You can use either term to describe the detailed breakdown of your credit score.
Bankruptcy – Bankruptcy refers to the legal agreement you enter with a trustee when you have found that you cannot manage to pay off your debts. It can release you from certain outstanding debts that you then manageably pay off over an agreed period. There are consequences for bankruptcy and should not be entered into lightly.
Debt agreement – A debt agreement is an act of bankruptcy but is less severe. It also frees up your debts and gives you a fresh start.
Credit history – Your credit history refers to how you have used credit in the past. It considers the length of your credit history, how responsibly you have used credit in the past and the different types of credit you have used.
Default – In credit terms, a default refers to when you fail to fulfil an obligation, notably a financial obligation. It means you have failed to repay a loan or bill by the due date. However, before a creditor can list a default on your credit rating they must first send you two separate written notices.
Credit enquiry – Any time you make a loan application or apply for a credit card a lender will perform a credit check. This is otherwise known as a credit enquiry. The enquiry will be recorded on your file whether your application was accepted or rejected.
To sum up, loan applications, credit cards and credit score are all related as they can all affect each other. Though it’s important not to make too many loan applications as this can hurt your credit score, a solution to this would be to apply for a loan with Personal Loan Pal. We only do one credit check but look at multiple lenders for you. The relationship between credit cards and credit score is also strong. That’s because depending on how you use your card, it will influence your score. Nevertheless, a personal loan and credit card used in the right way helps to improve your credit score. So, don’t be scared to apply for a loan because credit can work in your favour!