Past bad decisions plummeted my credit-rating, using a credit-card what is the best way to rebuild trust?

Question

Back in my 20s I defaulted on a mortgage due to circumstances outside of my control (at least, that's what I tell myself - financially-pepper people don't ever get in to that situation). The house was repossessed, and only the other month I was able to pay off the difference of £7500 to the bank (as the house got sold at auction).

I have also managed to pay off outstanding County-Court Judgements, and as far as I can tell at 38 - I've satisfied all debt from my bad decisions.

I recently applied online for a credit card - not to do anything silly, but to try and rebuild my credit history. I've gone for a Capital One Mastercard (limit £500) @ 34.9% APR. I know the APR is high, but my question is - to rebuild a credit history should I be going for small purchases I know I can afford to pay off immediately, or larger ones?

Is there a formula for the best way to do this?

Unlike my early 20s self, I understand it's not free money. But Given that I have paid off some seriously large debts recently, I wondered what the best way of moving forward was.

Thanks in advance!

Answer 1

The weird thing is that if you use the credit impact simulators with the credit monitoring services, they show that the impact of paying your credit cards off completely is more negative than carrying a small balance, which doesn't make a great deal of sense, one would think. From what I can gather, the rationale is that carrying a small balance shows you making payments over time, as opposed to having a zero balance. This doesn't quite compute with me, but I don't truly understand the inner workings of the scoring models. To confirm this, I used simulators with both TransUnion and Experian, and both showed this. I know that it's easy to find people on both sides of this argument, so I can't say which is the best option (certainly whichever side someone falls on is the one they'll argue is the right one! chuckle).

In all fairness, your best tool is time. The effects of your prior bad decisions will lessen over time as they move further away in your history and then disappear altogether. Obtaining a credit card just because you think you need one is not a compelling argument, by any means. If you can't rationalize reasons why you need it then maybe you should question the wisdom of such a decision. If you don't have a particular need for better credit right now, why be in a hurry to take on debt?

Whatever the formulas are for calculating credit scores, the specific details are a pretty closely-guarded secret (they're proprietary for starters, plus it theoretically prevents people from "gaming the system" for a better score), but if you do enough research online, you can get a pretty good sense of how they work in general.

Whatever you do with your credit should be in line with your overall financial goals. If you want to remain debt-free (at least for now) then having a credit card you can't otherwise justify a need for just introduces temptations which could prove tough to resist ("wants" quickly turn into "needs" when you can put it on a card you pay later), then you're right back in the same place you were earlier in your life.

Instead of trying to figure out the "best strategy" for a credit card, first ask yourself how necessary it is to you right now in light of your financial objectives, then go from there.

I hope this helps.

Good luck!

Answer 2

Carrying a small balance is generally better for your credit score that paying off in full every month by virtue of the statistics and models that give you a credit score for a certain product. Banks don't want to lend to customers that aren't going to be profitable, in my experience customers who can show that they have credit over time are generally awarded a higher score.

So my advice would be to keep a small, manageable balance on the credit card, paying off the balance and then spending a little again on the card to keep at roughly constant balance. This revolving credit is the purpose of the product, and by showing you can use it sensibly, you will be rewarded over time.

Source: I build credit scoring models for a big UK lender, specialising in credit cards and personal loan modelling.