If you are looking for a new credit card, maybe to use for a balance transfer or to simply spread the cost of a large purchase, then it’s worth bearing in mind that lenders look at other factors alongside your credit score. So, even if you consider yourself to have a good credit rating, you may find that your application is refused.
For example, many lenders will look at your spending habits alongside your financial history and they can get this information by examining the ways in which you have utilized credit in the past. So if you currently have a balance on your credit card but you do not still use that card for new purchases then this can potentially work against your application. This is bad news for those wishing to transfer a balance to another card with a better interest rate.
Spending habits can also affect you if you are looking to take out a new card to spread the cost of an expensive item, particularly if you are already in possession of one or more credit cards. For example, you may currently possess a card that has a zero balance but you have not been using it because of it’s high interest rate and so you are looking for a card with a lower rate of interest. This seems like a perfectly reasonable way to manage your finances but it can work against you in two ways. Lenders may look at your spending habits and refuse you on the grounds that you do not regularly utilize your available credit lines, else they may refuse you on the grounds that you already have a reasonable amount of credit available to you.
In addition, it is also important that you do not let your credit cards approach their credit limit as this will also count against you.
What to do?
So what can you do if you fall into either of these categories? The simple answer is start using your card! But if you do start to use your current credit card to influence how your spending habits are recorded then try to mix up your repayments, maybe by paying off a little more than the minimum one month then paying the balance off in full the next. This does mean that you will incur interest fees for one month but it also shows the credit companies that you are playing their game and you are a responsible lender that they can still make money from. Of course, when you do finally get your new credit card be sure to pay the balance off in full at the end of each month so they do not make any more money out of you.
Other factors that lenders consider when reviewing new applications, and two that are almost inextricably linked, are credit history and age. Credit history is different to your credit score as it merely takes into account the number of credit lines you have had available to you in recent years, for example, loans, credit cards, overdrafts etc. Your credit score also takes this into account but also considers factors such as your repayment history and current levels of debt.
This is where a balance needs to be struck as you are likely to be refused for credit if you have little or no credit history but you may also have a negative result if you have too many credit lines available to you. Age may also play a part in this as not only will lenders consider you a greater risk but the younger you are, the less likely you are to have had chance to accrue much of a credit history. It is actually now the case that many lenders are unwilling to lend to anyone under the age of 25!
What to do?
If you already have a number of credit lines available and you feel you may be refused for a new card then do not apply for another card as this, along with the almost inevitable rejection, will look bad on your credit file. Instead, contact your current lenders and see if the have any offers on interest rates for new purchases or balance transfers that they can pass onto you as an existing customer. And, whatever you do, DO NOT cancel any existing accounts as credit agencies will just see this as a closed account, regardless of the fact that it was you and not the lender that closed it, and it will have a negative impact on your credit rating.
If you are young and/or have little or no credit history then the best thing to do to start building up a credit profile. Some good ways of doing this are to take out a cell phone contract, speak to your bank manager about a small overdraft on your current account or take out a prepaid card. Prepaid cards give you the benefit of having a credit card without the risk of getting into debt as you need to load the cash on from your bank account before you can start spending. As no one is actually lending you the money you cannot get into debt but any transactions you make on your prepaid card should show up on your credit file and will add to your profile.
Article written by Les Roberts, credit repair specialist.
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