Chances are you already own at least one credit card – and so does a majority of the UAE population. Owning a credit card goes far beyond fetching you cashback or rewards on your purchases, and in fact, is a useful tool to build your credit score as it demonstrates your ability to manage debt. On the flipside, credit cards can also negatively impact your credit score. But how? What happens when you own too many cards or fail to pay off your outstanding balance?
Let’s explore the various ways credit cards can impact your credit score:
#1 Making late payments
Your payment history speaks a lot about how you handle credit and failing to pay your bills on time is the most damaging thing you can do to your credit score. Make sure all payments are made before the due date, and in the worst case scenario, ensure you pay it off within 30 days past due before it is reported to the credit bureau.
#2 Applying for too many cards in a short span
Opening a new credit card account can have a marginally negative impact on your credit score. Conversely, it can also have the opposite effect by bringing down your credit utilization ratio, which is the amount of debt you owe in relation to the credit limit you have. However, opening too many accounts in a short span can end up lowering your score, since research indicates that people who’re looking for more credit are more likely to land into financial trouble.
#3 Maxing out your limit often
Credit cards come with a pre-set credit limit, which is the maximum amount of credit you can avail from the issuer. While you’re allowed to avail credit up to the limit, it certainly reflects poorly on your creditworthiness if you use it all up. Maxing out your limit makes you look like a risky borrower and may negatively impact your score. It’s best to stick to the 70-30 rule where you keep the balance 30% below the limit.
#4 Closing a credit card account
If you’ve basically clawed your way out of debt, the first thing you’d want to do is close the credit card account. But this could hurt your credit score and can increase your credit utilization ratio. Hold on to your account, especially when you have a positive payment history. If you don’t trust yourself with it, lock it away in a safe place or simply cut the card up.
#5 Applying even when there’s no real need
Simply applying for an additional credit card can prove detrimental to your credit score, irrespective of whether you open an account or not. Every time you make an application, a record of it goes into your credit report. Making an exceedingly large number of applications could backfire when you apply for a card you want and find that your score has dropped, causing you to lose out on the best rates and deals. Always carry out a thorough comparison, and apply only if you really need one and can afford to make repayments on time.