
05 Feb Will a Credit Card Improve My Credit Score?
Are you wondering whether a credit card will improve your credit score? The answer is more complicated than a simple yes or no. Credit cards can improve your credit score if you pay them off in full every month while still maintaining a small balance and a diverse credit portfolio. If you don’t make minimum payments, pay late, or miss payments, your credit score will drop dramatically.
Credit cards are a valuable tool for demonstrating your financial responsibility and improving your score – if you use them responsibly. In this post, we’ll discuss how credit cards can improve or lower your credit score, the types of credit cards there are, the factors that influence your eligibility, how to apply for a credit card, and how to raise your credit score to boost your chances of qualifying and lower your overall interest rate.
Let’s dive in!
How Credit Cards Can Boost Your Score
Credit Cards boost your score when you use them wisely. This means paying them on time and in full – or at least more than your 5% minimum payment – each month. When you do this, you demonstrate that you can manage your accounts well, showing the bureaus and lenders that you are trustworthy and money-wise.
Every time a creditor reports a positive payment, your credit score increases by more or less three points, depending on how often they report it. A diverse credit portfolio (debit orders, insurance, and revolving credit accounts, like credit or store cards) is also a great way to improve your credit score, as it shows you’re responsible for different sorts of credit.
How Credit Cards Can Lower Your Score
If you miss payments or make late payments, your score will drop dramatically. This is because you demonstrate that you’re irresponsible with credit or don’t have the repayment capacity to afford it, which shows lenders and bureaus that you’re not up to the task of managing credit well. Missed and late payments remain on your credit score for five years, damaging your future chances of taking out credit and receiving optimal interest rates, particularly for large payments, such as mortgages.
How to Use a Credit Card to Boost Your Score
This section discusses how to use your credit card to boost your score.
Maintain a Positive Balance
You don’t necessarily have to go into debt to build your credit score with a credit card. You can transfer money into your credit card from another bank account to maintain a positive balance and use this balance instead of incurring debt. So long as you use your credit card, you’re utilising a credit portfolio and raising your score. You can use your card for everything, from groceries to Uber, upping your score. The more you use your card, the more your credit score will rise.
Integrate Your Life Into Your Credit Provider’s Service Portfolio
Credit providers like Discovery also offer health insurance, life insurance, short-term insurance, retirement annuities, and more. When you use your insurer’s other financial products and services, you’ll likely earn points and diversify your credit portfolio, which increases your credit score. For instance, Discovery offers Vitality points, and FNB offers eBucks.
Spend Only What You Can Afford to Repay at the End of the Month
Don’t fall into the trap of “It’s one small thing, I’ll repay it over two months.” All the small things add up, and soon enough, you may find yourself immersed in a mountain of repayments you can’t afford, which can take years to recover from. If you must create debt with your credit card, only create debt for things you can afford to pay directly at the end of the month, such as groceries.
Don’t Use More Than 30% of Your Limit
Don’t use more than a third of your credit limit. The credit you use compared to the total amount you have available is called a credit utilisation rate. Using more than a third of your limit will drop your score, as it shows you’re credit-reliant.
Types of Credit Cards
There are two types of credit cards: secured and unsecured.
Secured
Secured credit cards are credit cards that have a prepaid limit set by you. You’ll give the bank a deposit, which they’ll use as your limit. This way, if you default the bank will be able to recover the money they lost. These are usually much easier to qualify for than unsecured credit cards.
Unsecured
On the other hand, unsecured credit cards are much harder to qualify for. This is because the bank has no way to recover their lost funds in the event of your default. You won’t have to put down a deposit and will only (usually) be charged an initiation fee.
What Influences Your Eligibility for a Credit Card?
Everyone is eligible (so long as they’re over 18) for a secured credit card; however, not everyone is eligible for an unsecured credit card.
To be eligible for an unsecured credit card, you should:
- Have a positive payment history with an insurer or a secured credit card.
- Not have missed or made late payments.
- Have a low balance and credit utilisation rate.
- Have a history with different sorts of credit, such as car finance or a store card.
- Permit your credit provider to check your credit report.
You should also have an excellent credit score, at least 600. The average South African’s credit score is 580.
How to Apply for a Credit Card
First, research the credit cards you’re eligible for by checking your credit score. For most credit providers, you’ll need a minimum income of R8,000 after-tax (net).
You’ll have to provide proof of address, a three-month bank statement, your ID and ID number, and sometimes, an employment contract.
The easiest unsecured credit cards to qualify for are:
- Capitec GlobalOne
- Discovery Bank Gold
- African Bank Black
- Absa Flexi Core
- FNB Aspire
You can be pre-approved for any of these by downloading these banks’ apps or visiting their websites.
How Can I Check My Credit Score?
Credit Boost offers free online credit score checks! To get your free, full report, click the red button at the top right of your screen or contact us. We would love to be of assistance.