Does Not Using A Credit Card Affect Your Score?
Why Does Not Use A Credit Card Cause An Impact On Credit Score?
A credit score is one of the most influential parameters that define your creditworthiness as a borrower. It is a numerical representation of an individual’s creditworthiness and is relied on in issues to do with borrowing, ranging from loans to renting an apartment. It is therefore only logical to ask: does not using a credit card impact credit rating? Let's find out.
Credit Score-Its Importance And How It Works
A credit score is a number representing a person's creditworthiness ranging from three numbers. It is calculated using your credit record and performance. Its range is from 300 to 850. You are thus more creditworthy and dependable to the lenders the more points you have. This shows that you manage debt well and satisfy your financial responsibilities on schedule.
Credit reporting companies like Equifax, Experian, and TransUnion determine a credit score. To arrive at your score, they consider your record on payments, credit mix, credit queries, credit history age, and credit use rate.
In this case, you will learn why credit score is important.
Your credit score holds high significance because that three-digit number impacts big things like.
- Approvals on credit cards and loans
- Interest rates that Banks and NBFCs charge to their customers
- Possible approval of rental accommodations
- Securing a new connection for a mobile phone
- Buying insurance
- Employer’s screening
Thus, a good credit score provides an opportunity to get a loan and credit cards with lower interest rates. Therefore, managing your credit score is something that has to be on your list of priorities.
Is There a Way that Not Using a Credit Card Can Cause Your Credit Score to Drop?
The proper usage of credit cards is always beneficial in building up the credit score. But never having a credit card in the first place does not entitle one to a bad credit rating. It is possible to sustain a high score even if the person does not possess a credit card. However, you must know how it functions or how it is used.
Credit Mix
Credit mix can be defined as the various kinds of debts that you have contracted; these include mortgages, personal loans, car loans, and credit cards. Credit mix is important as creditors look at it when evaluating your creditworthiness.
A good credit utilization shows that you are capable of handling various accounts, which are revolving in this case. If one had more of a certain kind of loan than the others then this is referred to as an imbalance of credit.
Therefore, non-usage of credit cards influences the credit mix but it does not have a very high degree of influence on the score. So, as long as you have other active loans that you make payments on time, you can have a good credit score.
The article contrasts: No credit history, Bad credit history
No credit is always better than bad credit with payment defaults or collections. If you do not use a credit card facility then there will be no record of the repayment for them. That is to say, there is no positive history or negative history.
Lenders want people with no credit history rather than people with a history of poor credit. The rationale is quite obvious – people with a bad credit record act irresponsibly. The ones with no records offer an opportunity to evaluate the creditworthiness of the applicants from scratch.
Other ways of building credit without a credit card
Again, if you do not own or even desire a credit card, you do not have to panic. There are a few other ways to build credit.
Take an Installment Loan
Secure loans such as credit building loans, personal loans, student loans, auto loans, and home loans contribute to the creation of credit history. These have a repayment schedule that spans months or years and thus, faithfully paying installments portrays efficiency in fiscal management.
Become An Authorized User
Your family or friends may include you on their credit card as an authorized user. If done properly, you enjoy a good credit history as a result of your performance without even possessing or using a card.
Avail Credit Builder Loans
Some credit unions and some banks offer credit builder loans. These loans provide you with the loan amount in a bank account. The amount is not available to you during the repayment period which can be one year. Be sure to pay your bills on time to help improve your score.
Maintain Low Credit Utilization
Ensure that the balances on your loans are relatively small in comparison to the credit limit. High credit utilization is a sign of credit risk, whereas low credit utilization is perceived as better money management.
The Effect On Credit Rating
Not using a credit card leads to.
- In the following field, enter details regarding credit card payments that have no credit history.
- An uneven credit mix
But if you have other installment loans and they are in good standing, then your score will not be affected. Furthermore, other loans offer an opportunity to establish a good credit history and repay them responsibly.
First Time Credit Card Applicants
If you are applying for the first credit card, the issuers do not have any credit score data to consider for your application. Hence, they may:
- Request for a security fee
- Suggest a secured credit card
- Decline the application
You can also negotiate credit for other loans and apply again after some time. You are likely to be approved than if for instance, you were seeking a personal loan.
Summing Up
In fairness, not using a credit card does strip one of the most effective ways in which credit can be built. However, that on its own does not result in a poor credit rating. On the same note, it is possible to build up a good credit score even without credit cards by servicing other installment loans properly. However, most of the creditworthiness comes from responsible borrowing and timely repayment. Thus you can see that it is possible to construct a high credit score without laying your hands on a piece of plastic. Just do well enough to manage your money well.
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