Can credit cards be used to build your credit score?

Using and managing a credit card well may, over time, improve your overall credit score.

Why a good credit score is important

  • The higher your credit score is, the more likely it could be that a credit card, mortgage, personal loan, overdraft or car finance application will be accepted.
  • Depending on the type of borrowing, the lowest and longest lasting interest rates might be offered to low risk applicants, who’ve shown they can manage their finances responsibly over time.
  • Your credit score can also affect the amount of credit you are offered.
  • Bad credit might affect your ability to get some jobs, e.g. in legal or financial services.

It’s important to know that the way you use and manage one type of credit, such as a credit card, is just one of the factors which may influence your credit score.

More about credit scores

Improving your credit score with a credit card

Using a credit card and making regular payments, can help to demonstrate how responsibly you manage credit accounts. It could help your credit score to:

Build your credit history

The average age of your active credit accounts can influence your credit score. Having the same accounts for a long time suggests you can manage them responsibly.

If you’ve little or no experience with credit, even if you have a good income, your credit score may be low, simply because there’s little to indicate how well you can manage borrowing and repayments.

Use a mix of credit types

Having a range of credit accounts shows you can manage different types effectively, from secured lending, such as a mortgage, to unsecured lending, such as credit cards or overdrafts.

Just bear in mind, whether or not you’re accepted, ‘hard’ credit searches may affect your credit score, especially if you make a number of full applications in a short period of time.

Keep credit available

Credit reference agencies look at the amount of credit available to you, less the amount you’ve used – known as the credit utilisation ratio.

Try to keep balances below 25% of your available credit limit.

How a credit card could damage your credit score

To protect your credit score, it’s important to use and manage credit cards carefully.

New applications

Whether or not you’re accepted, hard credit searches could affect your credit score, especially if you make a number of full applications in a short period of time.

Many credit card providers now offer ‘soft’ credit searches, also known as an eligibility check, helping you to find cards you’re eligible to apply for, without impacting your credit score.

Going over your credit limit

Like missed or late payments, lenders and service providers will also report instances where you go over any agreed credit limits, which are common on credit cards, overdrafts and store cards.

This can impact your credit score for a number of reasons. Not only will your credit utilisation ratio be too high, but being over your credit limit suggests you could be struggling to manage your finances.

Making payments on time

This is one way to show you can manage your finances responsibly. Lenders report arrears, missed, late or defaulted payments, which may negatively impact your credit score.

It may be a good idea to set up Direct Debits to make automatic payments, but you’ll still need to make sure there’s enough money in your bank account to cover payments when they’re due.

High debit balances

If you carry a lot of outstanding debt and are often close to your credit limits, it could suggest you rely on credit. If your circumstances were to change, would you struggle to repay anything you’ve borrowed?

As well as potential impact on your credit score, this could influence the way lenders or other service providers view you and any new applications you make.

Can closing a credit card affect your credit score?

If you close a credit card account, it could lower your credit score. There are two primary reasons:

  1. Your credit utilisation ratio may have changed – the difference between your available credit and what you’ve borrowed could be narrower.
  2. Keeping long-held and well-managed accounts helps to demonstrate that you can manage credit responsibly over time.

However, the impact may be temporary and closing a credit card could help you:

  • Keep closer track – with fewer accounts to manage, the risk of making other mistakes which could affect your credit score, e.g. missing payments, could be lower.
  • Limit the temptation to overspend.
  • Limit potential fraud on open accounts.
  • Switch to a card with interest rates which better suit your credit needs.

Improving your credit score is a delicate balance between having and using credit, but not too much.

Tips on managing credit cards

  • If you pay late or miss a payment, you may have to pay fees, lose any promotional offers you have, and it could damage your credit score.
  • Your credit score could also be affected, which may make it harder to borrow in future, so it’s important to keep track and manage your account well.
  • You must make at least the minimum payment on time each month, but we recommend paying as much as possible to reduce your balance and the amount of any interest you pay overall. This could also help you to avoid falling into persistent debt.
  • Unless a 0% promotional rate applies, to avoid paying interest on purchases you need to pay off your monthly statement balance in full and on time every month.

Tips for managing credit cards

Many factors influence your credit score

The way you use and manage a credit card is just one factor which could impact your credit score.

Others include being on the electoral register, how often you move home and change your address, how well you manage household bills, and even the credit history of someone you have joint accounts with.

Key points on using a credit card to boost your credit score

A well-managed and long-held credit card could help to build your credit score over time.

  • A good credit score could improve your chances of being accepted for credit in future.
  • When using a credit card, always make payments on time and minimise what you spend.
  • Damage can be caused by holding high debit balances, missed or late payments, going over any agreed credit limit and new credit applications.
  • Managing a credit card well is just one of the factors which can influence your credit score.

Where next?

Know where you stand with Lloyds Bank

Sign up for ‘Your Credit Score’ to see your rating with TransUnion. It’s free to check and won’t hurt your credit score.

More about Your Credit Score