Credit cards are not only the way many people ruin their credit rating, but are also the way many of them go about repairing it. By changing their financial behaviour and using a credit card wisely and responsibly, a borrower can rebuild a good record of repaying debt and demonstrate a responsible attitude.
Credit ratings are necessary for borrowing money, and not just with credit cards but also business loans, home loans, and car loans. The importance of credit ratings has been growing in recent years, with increasing numbers of people and businesses using them as a proxy for good financial behaviour. Insurers, investors, suppliers, and employers all look at credit records before deciding whether a person can be trusted in a position of financial responsibility.
This doesn’t only mean that a person with a poor credit history will find it hard to get a loan. It also means that people with a patchy credit history, such as students or recent immigrants to Australia, will find it hard to borrow money.
Credit cards can be used to repair or build credit by borrowing a small or manageable debt on the account and then paying that debt in full. There are however secondary factors with credit cards that can influence the number of credit cards a person should have.
The first issue is the amount of credit that is actually available. A person with four or five credit card accounts may have quite a lot of credit available, and if they are only using one or two cards actively, only a proportion of their credit is being used. This can be good for a credit rating, as the unused balance on a credit card is often taken as a sign the borrower is not reaching the end of their credit limit and that their credit worthiness is high despite any issues on their official credit rating.
There are some other issues with credit cards and credit ratings. One is that applying for a large number of credit cards, more than six or seven, can be detrimental to the credit rating if done within a short period of time, as this is often seen by lenders as an advance sign of money trouble. With this in mind, it’s rarely a good idea to apply for a number of credit cards all at once.
