Credit cards are a convenient way to manage finances, but how you use them can significantly affect your credit score. Sovereign Boss Financial Advisors, a leading financial advisory firm in the UK, outlines the types of purchases that could harm your credit score and offers advice on managing them responsibly.
Large Purchases
Using a credit card for big-ticket items, such as holidays, furniture, or electronics, can quickly increase your credit utilisation ratio. Credit utilisation—the percentage of your available credit that you use—is one of the most important factors in determining your credit score. If you max out your credit card or come close, it could damage your score, even if you plan to pay it off over time. Ideally, keeping your utilisation below 30% is recommended for optimal credit health.
Household Expenses
Using your credit card to pay for day-to-day expenses, such as groceries, fuel, and utility bills, might seem like a good way to manage cash flow, but if you’re unable to pay off the balance in full each month, it can add up. Regular use for routine expenses can lead to higher balances than expected, potentially harming your credit score if your balance is left unpaid over time.
Impulse Purchases
Retail therapy or spur-of-the-moment buys, particularly during online sales or seasonal promotions, can quickly lead to a growing credit card balance. Although these small purchases may not seem like much individually, when combined, they can become a burden. Without a repayment plan, impulsive spending can increase your debt and reduce your credit score.
Cash Withdrawals
Taking a cash advance on a credit card is one of the most expensive forms of borrowing. In the UK, cash withdrawals from credit cards come with higher interest rates and fees, and interest begins accruing immediately, without a grace period. These transactions are also flagged negatively on credit reports, as they may indicate financial distress, which could lower your credit score.
Subscription Services
Using your credit card for monthly subscription services, such as entertainment platforms, fitness apps, or meal kits, can become problematic if not managed carefully. These recurring payments can easily add up, especially if you forget about them or subscribe to multiple services. Failing to stay on top of these small but consistent charges can increase your overall balance and affect your credit score.
Balance Transfers
Balance transfers can help manage debt, but using too much of your available credit for these transfers could negatively impact your credit utilisation ratio. Additionally, some lenders in the UK may view a reliance on balance transfers as a red flag, potentially affecting your credit score. It’s important to manage your available credit wisely and avoid relying too heavily on balance transfer offers.
Managing Your Purchases to Protect Your Credit Score Sovereign Boss advises consumers to carefully monitor their spending, ensure they pay off their balance in full each month, and avoid excessive credit utilisation. By being mindful of how you use your credit card for purchases—especially large or non-essential ones—you can maintain a healthy credit score and ensure long-term financial stability.
