What really damages your credit rating
Filed under: Loans
A while ago, an incident involving my credit card provider made me cross. I'm going to tell you about it - so you know exactly where you stand if it happens to you.
The end of the line
For just over a year, I had a Virgin Money card. I transferred some debt onto it at the beginning of that period, and I'd been gradually paying it off (at 0% interest) ever since.
I finally cleared the balance - hooray! The card had done its job very nicely, and, because I no longer had a need for it, I phoned Virgin and asked to cancel the card and close my account.
The customer service chap told me that if this was the only credit card I had, I would damage my credit rating by closing it.
I was surprised but, assuming this was just a ploy to keep my business, I politely but firmly closed my account in double-quick time.
Afterwards, however, I started to worry. Was it just a stunt to encourage me to spend more on the card? Or could what he told me actually be true?
The truth behind the spin
Following my run-in with Virgin, I did some research into how canceling a card can affect your credit score. Here's what I found:
To maintain a healthy credit rating, it is a good idea to have some credit arrangement in place - or to have a fairly recent history of one. This will show potential lenders that you're a responsible and reliable borrower.
This doesn't have to be in the form of a credit card; it could, for example, be a personal loan, mortgage or other regular repayment plan. Having two different lines of affordable credit - and servicing them regularly - is ideal from a credit record point of view.
If you have no credit cards, have never HAD any credit cards, and have never borrowed in any other capacity, you won't have much of a credit history at all. That lack of evidence may well mean that lenders are unwilling to deal with you.
However, it's not a good idea to keep cards open if you're no longer going to use them. Dormant cards are at greater risk of fraud (because you won't be checking your statements regularly). On top of this, having unused credit limits all over the place will make potential lenders wonder what you're up to.
In short, there's no rule that says closing a credit card will or won't damage your credit score - so many variables are involved.
Personally, I have a long history of taking out credit cards and loans, and paying them back on time. Although I didn't have any other credit cards then, I did have two other loans that I'm servicing regularly. As a result of both these factors, closing my Virgin card will almost certainly not have substantially affected my credit rating.
I think the 'advice' I received from Virgin was actually a sweeping generalisation (presumably designed to keep my business) which took little or no account of wider circumstances.
In the interests of fairness, I should say that the Virgin Money credit card was a competitive credit card. And, according to the Virgin Press Office, it is not standard practice to tell customers that closing down an account will damage their credit rating.
Still, it happened to me - and I'm not impressed!
So what does damage your credit rating?
To help you separate the wheat from the chaff, here's a quick rundown of the main factors that could damage your credit record:
Missed/late payments: Paying bills on time is generally the most important way of maintaining a good credit score.
If you default on a credit agreement, you're likely to be viewed as a high-risk borrower for some time to come. Any late payments will remain on your credit report for at least three years.
Repeated applications: Applying for a lot of credit over a short period of time (typically more than twice in six months) can make lenders think you're desperate, and regard you with suspicion.
Improve your credit rating
If you're struggling to get hold of credit, find out how to increase your chances of getting accepted.
No electoral presence: Lenders will check that you are who you say you are by looking at the electoral roll. If you're not on it, you may be seen as less stable (or at least trackable) and be refused credit on this basis.
A bad financial association: If you're 'financially associated' with someone who has money problems, their debts could be damaging your chances of getting credit. To find out what 'financially associated' means, read Don't let a partner ruin your credit rating.
High levels of unused credit: This can occur if you have several, dormant credit cards and other accounts still open that you no longer use.
Your credit record is also likely to be seriously damaged if you have any County Court Judgments against you - or if you've been made bankrupt in the past.
If I want to maintain my good credit rating, what should I do?
Whatever your situation, don't let your card provider scare you into spending more on a card that no longer suits your needs.
You can get a free credit report from Experian, to help you work out exactly where you stand. Just remember to cancel your membership before the 30-day trial period is up, to avoid being charged in the future.
If you have other credit agreements you're still servicing (such as a mortgage) or you have a strong recent history of using credit, canceling that credit card should make no difference at all.
And if you do decide you want to keep using a credit card to maintain your rating? Think about whether the card you've already got is really the best one to use.
For example, my Virgin Card was good for dealing with a balance transfer, but I wouldn't want to use it for new spending. For that, I'd choose a card that offered decent cashback or other reward incentives.
Whichever card you end up with - make absolutely sure you clear the balance every month. Sinking deeper into debt certainly isn't the way to build a good credit record!