It’s common to feel overwhelmed when requesting your credit score. At first glance, it’s not easy to grasp so many factors influence although it’s a simple process. Credit agencies use this score to work out a likelihood of paying back the debt for which you are applying. Any change in your financial situation changes your score.
When you have a bad credit score you are not stuck there forever; it’s not impossible to fix. It does mean, however, that most types of credit, including a credit card, will be difficult to obtain until your score improves. Those that will accept your application are likely to grant you a relatively low credit limit.
The relationship between your credit rating and credit cards
Merely having a credit card and making payments is will improve your credit score so long as you keep up minimum scheduled payments. All credit cards expect account holders to make payments every month of a specified minimum which is expressed as a percentage or a flat amount, whichever is higher. You will find that most terms are £10 or 5%, for example. This minimum payment is one of the most important aspects in calculating your credit score.
Repaying on time and ensuring you make the minimum is a good way of demonstrating that you are creditworthy. A missed payment is one of the biggest contributing factors to a lowered credit score. It will make obtaining credit harder. If you’re looking to take out a mortgage or major loan, the missed payment could be the only thing stopping you. It may also damage your ability to take out another credit card.
How a credit score impacts available limits on credit cards
When you have a lower credit score, lenders will insist on certain restrictions. The most common is a lower credit limit. If you have a low credit score, you are perceived as a high risk to the lender. Therefore, the credit card limit may be just a few hundred pounds. Even if your credit score is high enough to qualify for a regular credit card, with a low score you might have an insufficient credit limit for your needs.
It’s important to remember that there is no single, universal score. Different lenders use different credit agencies, and sometimes, slightly different methods of calculating your score. This is no better demonstrated than in the amount of credit available to you. One agency might decide that a lot of available credit is a positive thing – that you are good at managing money. Another might decide the opposite – that you are too reliant on credit and should have it restricted as a precautionary measure.
Can you still qualify for a credit card with a low credit score?
If you have recently been refused a credit card, you should stop applying for well-known brands and regular cards. These credit cards are designed for people with good or excellent credit scores. Naturally, for the time being, they are closed to you. Further applications will only likely damage your score further.
However, all is not lost you are still eligible for credit cards aimed specifically at people with a bad credit rating. There are plenty of options; those that will accept your application may insist on any of the following:
- A higher rate of interest on your outstanding balance. So long as you clear the balance each month, you will incur no interest;
- A lower credit limit than normal to offset the risk suggested in the score;
- A higher minimum monthly payment than the standard 3%-5% stated above;
- The payment of a deposit or an annual subscription fee.
What are your alternative options if your score is too low for most credit cards?
Firstly, there is no need to panic. Clearscore reports that around 1/3 of credit card applicants are rejected every year. You have several options available to you if your credit card application is rejected.
- Apply for a secured credit card. This is a type of card where you use a security as collateral against the credit card debt. If you default on a payment, the security effectively becomes the property of the lender. Use only if confident you will not default.
- If you have several credit cards already, or any other kind of debt, you can begin repairing your score by clearing it. Paying more than the minimum required monthly payment regularly is one of the quickest ways to repair your credit score. This may not be possible on a loan, but it is possible for a credit card.
- Transfer balances and close unused store cards, credit cards, and other accounts. Having too many credit cards is often a bad sign, even if you are able to clear each month. Consolidating your debts onto one card makes it easier for you to manage your money and repairs your credit score.