If you are on the lookout for a loan, credit card, mortgage application, overdraft or most other forms of credit, you are going to need a good credit history – and in some cases – a good credit score. But if you have never had a credit agreement how do you start to build a good history and score?
What is my credit score?
Your credit score is a category or number that shows a lender how good or bad a credit risk you are to the. In most cases the higher the score, the better the risk you are. Your credit score determines:
- Whether or not a lender is willing to risk lending you the money
- How much they are prepared to lend you
- What interest rate they will charge you
Your credit score is based partly on your credit history, which records how you’ve borrowed in the past, and how you’ve managed your debt to date. You need to build one before you think about borrowing. This is a must if you have moved to the UK from another country.
How do I build a credit history?
To start building up a credit history first of all you should take these simple steps.
Open and effectively manage a bank account
Providing you run it responsibly, setting up and using a UK current account will help build your credit history. By ensuring you always have enough money in the bank to cover your bills you demonstrate that you have a responsible ingoing relationship with a bank.
Your bank may offer you an introductory 12 month interest free overdraft, which is an alternative to applying for a credit card if you only need a small amount of credit for a few days. If you take this option you must be sure you pay off the overdraft before the interest free period.
I want to be clear, just by managing a current account responsibly it can help build your credit history, with, or without an overdraft.
Pay by Direct Debit
Not only does it ensure you pay your bills on time and don’t fall behind on your commitments, it will also improve your credit rating if you pay bills such as gas, electric and mobile phone bills in this way. Another added bonus is you usually get discounts for paying by Direct Debit too, especially on gas and electric.
Never miss any payments
Always pay your bills on time because missed payments have a negative effect on your credit history. Should a lender need to go to court to retrieve money from you, then a county court judgement (CCJ), or a decree in Scotland, will severely affect your ability to get credit and it will remain on your credit file for six years.
Is there anything that could stop me getting credit?
There are other factors beyond your credit history that a lender will check when working out your credit score and deciding whether they will lend to you.
Get on the electoral register
A lender will check to see if you’re registered to vote in the UK. It’s important you add yourself to the electoral register as quickly as you can.
Joint agreements with people with poor credit history
If you have a joint credit agreement (such as a loan) with someone else then their credit rating could adversely affect yours. If you did have such an agreement your credit file is linked to theirs and a lender can check their file as well as your own. If they have failed to keep up with payments on a mortgage or another loan, it could make your credit rating worse.
That’s why it is imperative to cut any financial associations with ex-partners by closing any accounts you have left open with them. You can do this by contacting a credit reference agency and asking for a ‘notice of disassociation’ to stop credit your credit files from being linked.
Final thoughts before you borrow
Build up your credit history for no less than six months before you start applying for credit. Check your credit file and make sure everything is up to date before you apply for anything. Have a long think before about the products that would be best for you and shop around! Most importantly, make sure you have the necessary funds to pay the debt back.
If you want something that could improve your credit score without the need for a credit check, why not check out Creditbuilder™
You can also see our infographic about improving your credit rating here.