It’s a likely fact that sooner or later you’ll require some form of credit, even if only a mobile phone contract. In order to be offered credit you’ll need to demonstrate a track record of responsible money management which is checkable by lenders when assessing whether to provide credit or not.
When you apply for credit such as a loan, credit card or even a mobile phone contract the company concerned will check your credit history. This is made up of several factors; chief among them being your financial history, such as how you’ve run your bank account, previous loans, credit cards and more.
The lender will compile a rating based on the information they know about you and this will determine whether they’ll lend to you and, if so, on what terms. For example, if you’re applying for a student credit card, your credit rating will help the provider decide what your credit limit will be.
Your credit record
As you open bank accounts, take out loans and credit cards, make payments and generally go about your financial business a credit history is built up and kept on file with three major credit agencies – Callcredit, Experian and Equifax.
A potential lender will use one or all of these credit reference agencies to help build a picture of your financial activities.
The need to build a strong credit record
Obviously the better your financial management the more likely a lender will be to offer you the facility you’re applying for.
Therefore, it’s wise to start building a credit record as soon as practical – it’s no exaggeration to say no credit record is as bad as a poor one. Without a way of assessing your ‘risk’ to them, a lender is unlikely to offer you anything.
How to build a credit record
Without overextending yourself or taking unnecessary risks, you can build a strong credit record from a young age.
- Electoral roll – make sure you’re on it; even if you’re a student or moving about a fair bit because of job changes, take the two minutes or so to register online.
- Bank account – manage it carefully and don’t exceed any overdraft facilities.
- Pay bills on time – meeting loan repayments, utilities and phone contracts promptly is a simple way to boost your credit score.
- Credit card – choosing an appropriate one and using it carefully will help your credit rating; use it for smaller amounts to keep it ‘active’ but beware of temptation. DON’T use it to withdraw cash at an ATM; transactions are recorded on your credit report and may look as if you’re using your credit card as a ‘last resort’ to access cash even if this isn’t the case.
- Credit building – as with using a credit card, using a loan to ‘build credit’ could be considered. Lenders such as Avant Credit will record your repayments with credit reference agencies to help build your credit history. The key is to borrow an amount you can comfortably repay.
- Space out applications – don’t apply for too much at the same time. Applications for credit are recorded on your credit file and too many in quick succession can be a negative for potential lenders.
Careful credit building
Along with the need to build a credit history is the importance of making it a good one – any defaulting, late payments, or seeming to disappear because you forgot to register on the electoral roll when moving out when you left university, will require some credit rebuilding.
*This is a collaborative post.