Adrian asks: “I have a capital one credit card, which I got over year ago now, purely to just get a bit of credit history that I lacked. As I’m looking to get a mortgage in a year or so time what is best for my credit rating for this card? “
Q&A 82 – Should I Use My Credit Card More? – Shownotes
I have a capital one credit card, which I got over year ago now, purely to just get a bit of credit history that I lacked.
It’s a cashback card which I was using regularly when I first got it, purely for the CashBack % and having a DD set up to pay off in full every month. The limit has gone up to £1500 without me asking and I’ve never got near using this.
However, for the last 6 months or so I have only used the card sporadically and again it’s always been paid off in full every month.
As I’m looking to get a mortgage in a year or so time what is best for my credit rating for this card? Use it daily, like a debit card, use it for say just diesel? or cancel it altogether?
Or does it not really matter as long as I pay it off when/if I do use it?
Thanks for the questions Adrian.
You’re Winning The Credit Card Game!
The good news, and my summary answer, is that you are using your credit card how we would suggest people should. If you are earning cashback, and you are never paying interest, then you’re winning!
In brief, I would recommend that you put as much expenditure on it as you usually spend. Obviously never buy anything just because you can pay for it on a credit card. But, if you are buying something anyway, you may as well use your credit card.
A Quick Example
As an oversimplified example, say you are going to make a purchase for £100 on the first day of the month.
If you pay for it with your debit card, you spend £100.
However, if you pay for it with a credit card, you could earn 1% cashback with certain cards. Also, your direct debit for the payment comes out 45 days later (for example) and so could earn interest on that amount whilst it sits in your account. For simplicity, let’s say you earn 3% per annum, then that is 0.25% each month and so 45 days equates to 0.38%.
So, by using your credit card, your net cost is only £98.62. You’ve saved £1.38. Doesn’t seem like much. But, it’s £1.38 for nothing and that is always worth having.
Remember, the catch is that you ALWAYS have to pay it off in full to make credit cards work for you.
Impact On Your Credit Score
Regarding your questions related to your mortgage application, then this is also relevant, but I wouldn’t say it should be the primary driver for you changing how you use your credit card.
As an overview, the more you use your credit card and pay it off in full each time, the better your credit will generally be. However, this is only true to an extent, and there are some other factors to consider regarding credit card use and your credit score.
One of the key factors will be your “available credit”. For example, say you have one credit card and that is the only credit that you have. If you have a credit balance of £1,500 and your outstanding balance is always sitting around that mark, then this indicates to a potential lender that you are “maxed out” on your lending and hence could be in financial difficulties.
So, my advice would be to put petrol costs, and your groceries, and other regular expenses onto your credit card in order to benefit from the additional cashback. As long as you don’t max out your credit limits, this should have a favourable impact on your credit rating for future lending, but isn’t something that will move the needle too far given your current position and credit history.
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