Mr M asked:
I am trying to build my credit score but feel I am getting nowhere.
I had 2 accounts in default which I paid about 1 year ago. My bills are paid on time. I have a Capital One credit card with a £200 limit. I always get £50 worth of petrol on the last Friday of every month and pay it manually a few days later.
But I got an email from Credit Karma saying “When your last report came through, it showed that you weren’t using any of your total credit limit. Not using any credit can actually mean your score suffers, as lenders can’t see you using credit responsibly.”
Is there something I’m doing wrong?
How frustrating! Sometimes trying to rebuild your credit score feels impossible.
Doing most of the right things to improve your credit score…
Getting a credit builder card is supposed to help your credit rating. And if you use it correctly, it works.
Mr M is clearing the balance every month. That should be best for his credit score. It also means he pays no interest, which is important with credit builder cards which have high interest rates.
And he is only using 25% of his credit limit which is good. It avoids problems with a high credit utilisation.
But why does his Credit Karma report say he isn’t using the card?
The one thing he is doing wrong!
The Credit Karma report is a snapshot of his TransUnion credit file. It just shows what Capital One has reported to TransUnion about his account at that point in time.
The report doesn’t see all the things he has bought during the month. Because Mr M is crediting his account with the money for the petrol after a few days, it isn’t showing up. So it is as though he hasn’t used the card at all!
The way round this is for Mr M to stop paying the card balance by transferring it from his bank manually.
All credit cards let you set up the account to be paid in full every month by direct debit. When you choose this, you get your credit card statement each month and the balance on that will be collected by a certain date.
This will mean he pays for the petrol much later. Filling up the car at the end of July and the balance will show on a statement in August and will be collected by direct debt probably in September. But he still won’t be paying any interest on this.
Most credit cards let you change the date the direct debit comes out to one that suits you. Many people like this to be their payday day.
And one area to try to improve
This credit builder card has a very low limit at the moment, less than £250. This is seen as a sign that lenders don’t really trust you, so it loses you points on your credit score.
This isn’t a large amount – only 40 points. See my article How much will my credit score change if… which looks at how important factors such as limit sizes and low utilisation are.
But if Mr M can ask Capital One to increase his limit to £300, that would be a small improvement.
Larger than that doesn’t make any difference until you can get over £5000.
All this is going to take a while
Paying his bills on time and using the credit builder card will start to get new, good marks added to his credit record. But with two defaults on his credit record, it is going to take time for Mr M’s credit score to improve.
The harm done by the defaults gets a bit less as they get older – How much will my credit score change if… gives the numbers. The defaults will drop off 6 years after the default date. And then his credit score will jump.
He has repaid the defaults – that’s good as it will make lenders much happier about offering him more credit. But it doesn’t actually affect his credit score.
Jumping through hoops
Credit scoring in Britain often seems to make little sense.
- Why is Mr M any more creditworthy if he repays his account by direct debit rather than paying it off just a few days after he buys something?
- Where is the incentive to pay off problem debt when it doesn’t help your credit score?
- Why should someone who is well paid, been saving money steadily for a house deposit and never had a loan or a credit card, find it hard to get a mortgage?
But those are the rules. Although jumping through hoops to get a better credit score seems daft and hard, you need to get it right.