I’m asked, quite often, how can I build a credit file if I am unable to take out any credit without having anything on my credit file in the first place?
It’s one of those annoying little conundrums akin to the job advert that requires you to have experience, yet without someone giving you the chance for you to gain that experience, how the fudge can you ever get the job?
I never really paid much attention to my credit score or credit file until about two and a half years ago.
It was very simple, so I thought, I had no credit agreements, paid all my bills on time and felt there was nothing there of any significance that I needed to check.
That was until I went for a very informal mortgage meeting with the bank.
I was told quite clearly, I didn’t have a prayer of ever getting a mortgage until I had something on my credit file to prove my creditworthiness.
The nice bloke who held the meeting informed me that regardless of me never having a penny of debt, a perfect 19 year rental history with not a single payment missed and references to prove it, and the fact the size of the mortgage I would require would mean me repaying a monthly fee less than half of my current rental charges, I would be required to get myself in at least a little bit of debt to be taken seriously.
No human element taking the facts into consideration, in short, computer says no.
Rather annoyed, I set off back home and got to work on building a credit file worthy enough for those bunch of bankers, and here is how you can build yours too.
What is my credit score?
If you are looking to take out a loan, apply for a mortgage, take an overdraft or get a yourself a credit card, you’re going to need a good credit history, and in some cases a good credit score too.
Your credit score is a category or number that indicates to a lender how good, or bad a risk you are when it comes to lending you money in the form of a credit agreement.
You credit score determines:
- Whether or not the lender will risk lending you the money
- How much they will be prepared to lend you
- What interest rate they will charge you
Your credit score is based partly on your credit history, which keeps a record of how you have borrowed in the past and how you’ve managed your debt to date.
You must build a credit history before you consider applying for credit, this also applies if you have moved to the UK from another country.
How can I build a credit history?
If you are starting from scratch like I was, then you are going to need to take these simple steps.
Open an effectively manage your own bank account
Providing you run it responsibly, setting up and using your own UK current account will help to build your credit history.
You must ensure you have enough money in the account to cover your bills, as this demonstrates you are able to manage your money properly and you have built a good, ongoing relationship with a banking institute.
Your bank could offer you an overdraft with an interest free period, which can be a good alternative to applying for a credit card if you need a short term solution that you plan to pay back within a few days.
If you ever do take the option of using an overdraft with an interest free period, you should make sure you have cleared the balance before the interest charges kick in because they can be extremely pricey.
I personally would never take an overdraft and I should be clear, just managing a current account responsibly will help to build your credit history without the need for an overdraft.
Pay bills by Direct Debit
Paying by Direct Debt makes sure your bills are always paid on time, providing you have the available funds for your bank to pay them.
If you pay bills such as gas, electric and mobile phone bills it will also improve your credit rating.
Another added bonus of paying this way is you are usually offered an extra discount from your bill, especially on the ones mentioned above.
For instance, my phone bill was reduced by £5 per month for doing so, and my fixed rate energy tariff is cheaper than paying on receipt of the bill too.
Never miss any payments
Missed payments have a negative impact on your credit score, and a credit history with lots of missed payments will stand out like a sore thumb to a lender you are asking to provide you with credit.
If a lender has had to involve the courts to retrieve the money that you owe, then a County Court Judgment (a decree if you live in Scotland) will severely affect your ability to obtain credit and will remain on your credit file for six years for any potential lender to see.
What could prevent me from being accepted for credit?
There are other factors beyond your credit history and your credit score you need to consider that a lender will check before making their decision about entering into a credit agreement with you.
A lender will check to see if you are registered to vote in the UK.
It is important you get yourself on the electoral register as soon as you possibly can.
Joint credit agreements
Another person’s poor credit history can adversely affect yours, so you should think long and hard before entering into a joint credit agreement.
Should that person have a credit file containing lots of missed payments and (or) defaults, it can severely impact on your own credit score.
If you have any financial associations with ex-partners you should close them, as even if they had a perfect record whilst you were still together, anything they do further down the line will still affect your own credit rating.
You can do this by making contact with a credit reference agency and asking for a ‘notice of disassociation’ which will unlink your credit files.
Final thoughts before you apply
It is advisable to build up your credit history for no less than six months before attempting to apply for credit.
Check your credit file thoroughly to make sure that everything is up to date such as your address etc, and also that your details are all spelled correctly.
Something as simple as your surname being spelled wrong can mean you are refused for credit as the information you have given won’t match up.
Have a long hard think about the product that will best suit you and shop around for the cheapest deal which allows you to pay it back in the quickest possible time.
Most important of all, before you apply for credit make sure you have the necessary means to pay back the money you are looking to borrow.
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