I spent years tearing my hair out about declined credit applications. I won’t lie, it was extremely frustrating.
I wasn’t in desperate need of the money, I simply wanted to improve my credit score.
It was incredibly annoying when I managed my money well and didn’t have any debts.
What I lacked was a history. Here is how not to make the same mistakes I did!
Understanding your credit score
If you are looking to apply for a credit card, loan, overdraft, or most other forms of credit, the lender you have applied with will perform a credit check on you when you submit any credit applications.
Your credit score is a category or number that gives a picture of your financial health which helps a lender to determine whether or not you are a safe risk for credit.
Your credit score is used to determine:
- Whether the lender sees you as a good or bad risk to give credit to
- How much credit they are prepared to lend you
- What interest charges apply to your credit applications
A big factor in your credit score is your credit history. This is where I had gone wrong. For years, all the bills in my house had been in my friend’s name.
I had no proof that I was reliable and paid my bills on time every time. Why would they trust me? No surprise that every credit application I submitted was declined.
You credit score is based partly on your credit history, which records both how you pay bills such as utility bills as well as how you’ve borrowed in the past, and how you have managed your debt and other commitments.
Don’t make the same mistake i did. Before you even consider applying for credit, build up a good history first, especially if like me, you have none.
If you are just turning or 18 or have recently moved to the UK it is vital.
How can I build my credit history?
If you are serious about building up a credit history, first of all you should take these simple steps.
It will save you a lot of frustration and help with that all important first credit application.
Build a relationship with your bank
By opening and managing a current account effectively you start to build a history with your bank that lenders can see.
By ensuring you always have enough money in your account and paying your bills on time you demonstrate to lenders that you have a responsible relationship with your bank.
Some banks may even offer you an overdraft with an interest free period of anywhere up to twelve months, which can be a viable alternative than applying for a credit card if you only need to borrow for a few days.
If you take an option such as this it is essential that you pay off any remaining balance before the interest rates start to kick in as they are very pricey compared to other forms of credit.
However, I must stress, you can build a good credit history just by managing a current account responsibly without the need for an overdraft.
It is a form of credit that I have never once considered personally myself.
Setting up your bills to be paid by direct debit or standing order is the easiest way to ensure your bills are paid on time.
It eliminates the risk of human error and stops you from falling behind on your commitments.
It will also improve your credit score if you pay bills such as gas, electric and mobile phone, if you pay by this method.
Another bonus of paying by direct debit is you are usually offered a further discount, especially where utilities and mobile phone contracts are concerned.
Don’t miss payments
Missing payments will have a negative impact on your credit score and will affect your credit history.
If a lender ever needs to go through the courts to retrieve the money owed from you, then a County Court Judgement (CCJ), or decree in Scotland, will severely affect your ability to obtain credit, it will also stay on your credit file for lenders to see for six years – something you really don’t want!
What would prevent my credit applications being accepted?
There are several other factors outside of your credit score that a lender will check before offering you any form of credit.
The electoral roll
Lenders will check to see if you have registered yourself to vote in the UK. You need to add yourself to the electoral roll if you want any realistic chance of being accepted for credit.
This is another mistake I made before applying, get yourself added ASAP.
Joint credit applications and agreements
If you are applying, or already have a joint credit agreement with someone else, their credit score can have implications on your own credit score.
If they have defaulted on other commitments they have it can have an adverse affect on your own credit rating and reduce your score further.
Cut any financial associations with ex partners etc. by closing down any joint accounts you have open with them.
To do this, contact your credit reference agency and ask them for a ‘notice of disassociation’ to stop your credit files being linked to theirs.
Check your credit file for mistakes and ensure it is up to date with addresses etc. Take at least six months to build up your credit history before attempting to apply for any form of credit.
Make sure the product you are applying for is the best method of credit for you, and always take the time to shop around for the best deal.
Your interest rate can be increased if you do not maintain a good credit rating, consider if this happened to you, would you be able to cope with the increase?
Most importantly, make sure you have the necessary funds to pay back the lender, and find a deal that allows you to pay off the debt as quickly as possible.
If you want to build your credit rating without the need for a credit check, you may want to consider CreditBuilder™
I did this for just over six months and was eventually accepted for a high interest credit card which i used a bit each month and paid off in full.
Since taking these steps my credit rating has gone from very poor to excellent in just over a year.
What tips do you have to build your credit rating? Were you refused for any credit applications?
He is also a contributor to Clear Debt, ICOUNT Money and M1 Debt Advice blogs discussing all things personal finance.