Just starting out? Here’s how to build credit
Not to side with lenders (we’re always on your side, after all), but they’re in a bit of a tricky situation when it comes to those who are new to credit.
It’s not necessarily that they don’t trust you. Rather, it’s more that they can’t see any evidence of your borrowing responsibly. That’s why it’s important to build a good credit score.
Here’s what you can do to help make lenders accept you.
Start with your bank — they could help you build a good credit rating
Your bank knows what’s going in and what’s going out of your account. Usually, this creates a basic level of trust.
If you’ve never taken out credit before, your bank is a good place to start.
Consider asking for an overdraft
Arranging an overdraft can be particularly useful if you have direct debits on your account, as it can act as a safety net for any payments coming out that you don’t have enough funds for. It helps because going into an unplanned overdraft will not only cost you a lot more, but also land a heavy blow to your credit rating.
When used sensibly, however, an overdraft can show lenders you can borrow responsibly.
It’s worth keeping in mind that, along with the interest fees you’ll pay for using your overdraft, some banks charge a fixed fee simply for the privilege of having one.
Consider asking for a credit card
A credit card might be a better option if you’re looking to build credit, so it’s worth asking your bank if you can have one.
If your bank says yes, it’s unlikely you’ll be offered the best deals if you’re just starting out.
However, a credit card can certainly help you build a good credit score when used responsibly. This means staying within your limit and paying on time each month.
To avoid paying interest, pay off the full balance each month.
Using a credit card doesn’t mean you have to overspend, either.
For example, if you normally spend £50 a week on food shopping, you could use your credit card to pay for it. Then use the money you’ve saved in your bank account to pay off the balance.
You don’t even have to wait for your monthly bill to arrive before you make payment: you can do so early, if that makes you feel more comfortable. Just make sure it counts towards next month’s bill, instead of an overpayment for your previous one.
What’s important, though, is that your spending behaviour shows lenders you’re capable of borrowing money and paying it back.
What about loans?
Your bank may also be able to offer you a loan, which is another possibility if you’re looking to build credit.
However, you’ll likely borrow much more and will repay in instalments, which means you’ll pay interest.
So, while a loan is a credit-building option, you need to be aware that it will cost you money.
Think about getting a mobile phone contract
Unless you’re living a pretty alternative lifestyle, it’s probably safe to assume you have a mobile phone. That being the case, why not have it help you build credit?
You can find many well-known mobile phone companies on the high street, so it’s worth popping in and seeing what you might be able to get.
As with all credit arrangements, it’s absolutely vital you meet your payments on time if you want to build good credit, because mobile phone companies will report your payment behaviour to credit reference agencies.
If you already have a handset you’re happy with, you could try a SIM-only plan. This will cost you a lot less, but it can still help you build a credit score providing you pay your bill on time.
If you already have a mobile phone contract, it should be part of your credit history already. Check your Free Credit Report to be sure.
Utilities can help you build credit
Gas, electric, and water are all things we use daily, and since that’s the case, it’s a good opportunity to have your utilities help you build your credit.
It only works if you pay your bills on time. It’s also worth noting that if your utilities run on pay as you go meters, your payments won’t help you build credit. If that’s the case for you, it’s worth contacting the energy companies to see if you can switch to a pay-monthly option, so you can build credit. Keep in mind that if you do this, you’ll be moving to a contract, and can generally only do so if your credit isn’t bad.
Managed credit poorly? Here’s how to rebuild credit
If you’ve managed credit badly, your job now is to convince lenders your poor borrowing history is a thing of the past. Here’s what you can do to help rebuild your credit rating.
Pay on time,
If you haven’t already, it’s worth setting up direct debits for the minimum payment each month.
Although solely making the minimum payment will take you ages to clear your debt, it should preserve what’s left of your credit rating and hopefully, over time, improve it.
Try not to spend any more if you’re paying off a balance on a credit card. At least, not until you’ve managed to get your financial situation better under control.
Also, don’t ignore the problem and hope it will go away. If you’re struggling to keep up with your repayments, it will only make your credit situation much worse.
Contact your lender and see if they can help. You might be able to arrange a payment plan that harms your credit rating less than missing payments altogether. If you’re in financial hardship, lenders should treat you sympathetically.
Check your credit report for errors
It’s important all the information on your credit file is consistent. A good way to check is to get your Free Credit Report.
It might simply be an honest mistake, such as an incorrect address history. However, errors could also be a sign of fraud.
If lenders think your credit application is not genuine — or they can see your details are inconsistent — they’re much less likely to accept you for credit.
Avoid payday loans — they often don’t help you build credit
Payday loan interest rates are incredibly high and can cause your debt to spiral out of control.
What’s more, many lenders will simply refuse to accept you for credit if they can see you’ve previously taken out a payday loan. They often take this as evidence that you manage money poorly.
For more tips on how to build credit, we recommend reading our guide: ‘11 tips on how to improve your credit score’.