Article by Jamie Mackenzie Smith - 7th October 2020

How To Build A Credit History Without A Credit Card

When it comes to the best way to build up a credit history, conventional wisdom is to take out a credit card and use it for everyday purchases, while paying it off (on time) at the end of every month. There’s plenty to support this advice too, as a credit card allows you to spend as much or as little as your limit will allow, while building a history in a reasonably short amount of time.

But many people don’t have or don’t want a credit card - with that figure having hovered around the 40% mark for some time. So how do you build a credit history without using a card?

Consider other forms of finance

If you’re new to the world of credit, then chances are you’ll be acutely aware of the problems of starting from scratch. To get a good loan or finance deal, you must first show proof of being able to reliably make repayments, but getting approved in the first place requires a good credit rating, creating a bit of a ‘chicken and egg’ situation.

Without a track record of being a ‘good payer’ you might find yourself limited to products with a higher APR - meaning you can easily end up paying a substantial amount more than the original cost.

Increasingly however, high street retailers are offering 0% finance deals on consumer goods above a certain value. Store finance is sometimes easier to obtain than a credit card or loan, due to a less strict lending criteria. Ensuring that you make these payments on time will help generate history of good repayment information on your credit file.

Electrical retailers, furniture stores and even some guitar shops will regularly offer 0% finance deals, which means you can get something you want sooner, while improving your credit history in the process (provided you make the monthly payments on time). This works for retailers because it means they are able to sell more expensive items to a wider audience that might not otherwise be able to justify parting with a large sum of money in one go otherwise.

We wouldn’t recommend taking out finance for the sole reason of improving your credit history, but the next time you make a big purchase it might be worth seriously considering whether spreading the cost could benefit you in more ways than one.

Avoid Payday/Guarantor loans

One product we’d specifically recommend steering clear of is payday loans – even ignoring the astronomical interest rates they come with, lenders see them as a sign of financial distress, and the presence of one on your Credit Report is likely to set alarm bells ringing.

While guarantor loans may not have the same adverse effect on the person taking out the loan as a payday loan does, it may impact the guarantor themselves when they come to take out a mortgage or other form of finance.

In both cases, the presence of these two types of loan will depend largely on the view of each lender, but steering clear of them both certainly won’t hinder any future applications.

Rent reporting

If you have a mortgage, you should have already amassed a lengthy credit history as a result of your monthly mortgage payments. But if you’re living in rented accommodation, in most instances your rent payments will not be reported in the same way. Unless your landlord has signed up to a rent reporting service, your credit file will not have received any benefit from making rent payments on time.

You can approach your landlord to get them to consider reporting rent payments, or you can sign up yourself, but at present only one Credit Reference Agency is involved with rent reporting systems, which means if you apply for finance with a lender that uses another Agency, this information will not show up in any case.

In the 2017 Autumn Budget, the government hinted at its interest to make this more widespread in the future and with open banking encouraging FinTech groups to experiment on this new platform, it seems likely that in time this will become the norm. Until then, rent reporting remains limited.

Credit checks

Credit checks themselves don’t count towards your overall credit rating, but for a lender assessing your file, they may take the occasional search on your file as proof that there is at least some activity going on in the absence of any other kind of credit history.

Many people believe that credit searches have a damaging effect on your credit file, but in reality this is only the case if an excessive number of searches are carried out in a short period.

Beware missing bills that can damage your credit rating

If you’ve checked your Credit Report in the past, you may have been surprised to see ‘utilities’ such as gas and electricity being reported, as well as agreements with telephone and digital TV providers.

While it’s not technically a form of borrowing, because you usually use the service in advance of paying, these companies are able to report how you pay to Credit Reference Agencies.

The repercussions of paying a bill late will vary from company to company, but they do have the ability to record a negative marker against you and harm your credit rating in the process.

The advice here is simple – as with all credit agreements, aim to pay by Direct Debit wherever possible, to reduce the chances of forgetting to pay on time.

It is worth remembering that not every type of monthly payment missed will result in negative markers on your Credit Report: for services that are paid for in advance (such as Netflix or magazine subscriptions), if you miss a payment you are more likely to just be cut off from their service.

Create a financial link with someone with a good credit history

If you open a joint bank account or take out a form of finance such as a mortgage with another person, you will create a financial association with them. If you are financially linked to someone that has a more extensive, and positive credit history than yourself, lenders will take this into consideration the next time you apply for finance.

Bear in mind that this works both ways: you can impact on any financial associate, and if they have a poor credit rating, it can actually have a negative effect on your own ability to get credit.

Register to vote and check all your details

Even if you haven’t borrowed money before, there is still likely to be information about you on your Credit Report, including your electoral roll status and former addresses. In the absence of any other credit history on your report, lenders may use this information to gauge your stability as a borrower. How long you’ve been living at an address is also shown alongside this information and generally the longer you’ve been living at an address, the more ‘secure’ you’re likely to be deemed by lenders.

Making sure you’re registered to vote is one of the most simple and effective things you can do for your Credit Report- it tells lenders that the address you’ve provided is still up-to-date. It’s important to check your electoral roll listing along with the rest of the information on your Credit Report before applying for finance; through no fault of your own, mistakes on your credit file can affect the outcome of an application for credit.

These steps should help to build your credit history and improve your creditworthiness in the eyes of a lender, but in terms of simple and effective ways of achieving this, you may still find that taking out a credit card and using it for regular purchases is better still. Using a card in conjunction with the steps above should help you build a well-rounded credit file, potentially allowing you access to some of the best offers out there.

If you haven’t checked your Credit Report before, you’ll find the checkmyfile Credit Report easy to understand, with helpful information to guide you through what each entry means. You can try checkmyfile free for 30 days, then for just £14.99 a month afterwards which you can cancel at any time. The trial gives you full access to the UK’s most detailed report, along with support from our professionally-qualified Credit Analysts.

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