The rise in online transactions has increased security threats to critical financial information. Virtual credit cards have become popular in recent years as a preventive method. These cards allow consumers to use their credit cards online without the risk of exposing their credit card information.
Consumers, however, are also concerned about the impact virtual credit cards may have on their credit scores.
In this article, we will explore how virtual credit cards work and how they can impact a customer’s credit score.
How Does a Virtual Credit Card Operate?
Virtual credit cards work similarly to traditional credit cards, with a few key differences.
When customers sign up for a virtual credit card, they are issued a unique, temporary credit card number linked to their existing credit card account. The virtual card number can be used for online purchases like a traditional credit card.
However, it comes with an additional layer of security.
For example, the virtual credit card number is temporary and can be cancelled anytime. It is rendered useless if a cybercriminal accesses the credit card information. This measure protects the customer’s actual credit card number from being compromised.
Additionally, customers can set spending limits and expiration dates for their virtual credit card numbers, which helps minimise fraud risk.
What Does a Credit Score Stand for?
A credit score predicts your credit behaviour based on information from your credit reports, such as whether you will repay a loan on time.
Businesses use credit scores to decide whether to offer you a mortgage, credit card, auto loan and other credit products, as well as for tenant screening. Using the score, credit limits and interest rates are also calculated.
Credit scores range from 300 to 850, representing your credit risk. Creditors and lenders use the credit score to determine whether to approve a new account application.
How Does a Credit Score System Work?
If you are eligible for a loan or other credit account, your credit score may affect your interest rate and other terms.
A scoring model determines a credit score range, but it is generally characterised by the following:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very good
- 800-850: Excellent
No “magic number” guarantees approval for a new credit account or a specific interest rate from a lender.
Higher scores, on the other hand, typically indicate that you have demonstrated responsible credit behaviour in the past, which may give potential lenders and creditors more confidence when evaluating a new credit request.
Why Do Credit Scores Matter?
When you apply for credit, the credit issuer may check your credit score first. The procedure is the same when applying for a credit card, a loan, or a mortgage.
Therefore, credit reports and scores are reliable indicators that allow a financial institution to assess your ability to repay the debt on time. They may also use internal scoring mechanisms to determine whether an individual is creditworthy.
How to Maintain a Good Credit Score: Insights from Finance Experts
Here are some tips to help you maintain a healthy credit score when using a virtual credit card:
1. Monitor spending
First, Keep track of your virtual credit card spending and stay within your credit limit. This will help prevent over-limit fees, which can negatively impact your credit score.
2. Pay bills on time
Late payments can significantly impact your credit score, so it’s important to pay your virtual credit card bills on time. Automate your payments so you won’t miss a payment.
3. Keep credit utilisation low
Your credit utilisation ratio, or the amount of credit you use relative to your credit limit, can impact your credit score. Keep your credit utilisation below 30% to maintain a good credit score.
4. Review your credit report regularly
Reviewing your credit report regularly can help you identify any errors or potential fraud and monitor your credit score. You are entitled to one free credit report from each major credit bureau every year.
What Is the Impact of a Virtual Card on a Credit Score?
Virtual credit cards have no direct impact on a customer’s credit score.
Credit scores are determined by payment history, credit utilisation, length of credit history, types of credit used, and recent inquiries. Whereas the virtual card generates a one-time-use credit card number for each transaction, so the virtual card does not impact a customer’s credit score.
However, if a customer uses a virtual credit card for a transaction and the merchant reports the transaction to the credit bureaus, the transaction may appear on the customer’s credit report and could affect their credit score.
The main benefit of virtual credit cards is that when a customer uses his or her virtual credit card, the transaction is reported to the credit bureaus just like any other credit card transaction.
Thus, using a virtual credit card can assist in building or maintaining a customer’s credit history, one of the most critical factors in credit scoring.
The use of virtual credit cards for online purchases is convenient and secure. Although they can adversely affect a customer’s credit score, it depends on how they use them. The added security provided by virtual credit cards can help customers maintain or even improve their credit scores.
Credit scores must be used in the lending process because they provide lenders with information about a borrower’s creditworthiness.
Lenders are using fintech solutions to evaluate credit scores and make lending decisions. It also helps them analyse more data sources and provide a more comprehensive assessment of creditworthiness.
Finezza: Seamless Lending Lifecycle Management and Faster Credit Evaluation
Finezza is one such fintech platform that provides a suite of cutting-edge products, such as the Credit Analysis solution that allows you to evaluate various combinations of data from multiple credit bureaus to provide detailed information about a candidate’s creditworthiness.
Besides improving your credit score, this will also allow you to provide credit to a broader range of clients, which you would have previously rejected based on one credit score.
In addition, reducing the time it takes to process a loan application will result in quicker disbursements and improved loan management.