Article by Beth Jennings - 21st October 2018

How To Build Your Credit History From Scratch

When it comes to building a credit history we all start from square one, but for some people this challenge can happen more than once, or much later in life than average. That might be because they’ve never borrowed money and have no credit history to speak of, or because they have had a financial setback and are starting again from scratch. No matter the reason, the catch 22 of applying for credit is that without previous proof of having and managing credit well, you’ll find it harder to be accepted.

Ultimately, credit ratings are nothing to do with how much money you have in the bank or how frugal you are, but how good you are at borrowing and repaying money, and generally managing credit facilities well. So how can you improve your chances of a potential lender looking at you favourably?

Make sure all the key information on your credit report is correct

Even if there’s little or no evidence of having held credit accounts on your Credit Report, you might be surprised at how much information is on there and how much of it is of interest to lenders. That’s why it’s essential to make sure what’s held on you is correct to give you your best chance of getting accepted for credit.

Whether or not you are on the Electoral Roll at your current or previous address, any financial associations you may have, court information, search and fraud information are just some of the things that are visible on your report and taken into consideration when you apply for credit. Making sure this information is correct and as up-to-date as possible will go a long way to winning-over lenders, especially when it’s all they’ve got to go on.

Errors on Credit Reports are rare, but because of the large volume of data being exchanged by lenders and Credit Reference Agencies, they do happen. Unless you check your Credit Report beforehand, the first you are likely to know about errors on your file is when you are turned down for credit unexpectedly.

When making credit applications, make sure you’re consistent with the information you provide and use the same format for your address (some flats for example can be written a number of different ways) as it appears on the Electoral Roll - this will make it much easier for a potential lender to find all the info they need.

What’s this information used for?

This information is checked over for two main reasons:

  • to verify you are who you say you are
  • to gauge your creditworthiness as a borrower

Not everyone that checks your Credit Report will see the same level of detail. There are two main views that someone checking your report might see: full and public data. Full data is generally accessed by lenders when you apply for credit and shows information such as what credit agreements you currently have, together with any credit limit, balance, key dates, monthly repayment amount and crucially, how you have made repayments over the last six years.

Public data is mainly comprised of Electoral Roll and Court Data. This is also seen by lenders in addition to your credit account information, but it can also be accessed by landlords or letting agents prior to renting a property, or when you apply for certain jobs – in financial services for example.

A number of companies will access your public Credit Report purely for identity verification purposes and again, will only see a subset of data compared to what a typical lender will access.

Show lenders that you’re stable

Overall, lenders like stability. The longer you’ve been in your job, or the regularity with which you’ve been registered to vote at your current address can work in your favour, especially if you haven’t had many agreements in the past.

Avoid hopping around (if you can help it)

Living at the same address for a long enough period will help show prospective lenders that you’re not being intentionally elusive. This is at times easier to control than others, but if for example you’re at university and you move from halls to a house and then switch at the end of your second year, that’s four fixed addresses in the space of three years (if you include your parents’ address too).

As long as you are both happy to have it that way, it might be easier to leave your current account registered at your ‘home’ address to avoid having to change it continuously. You’re also legally allowed to register on the Electoral Roll at both your term-time and home address while at University – although you can only vote once of course.

Make sure you’re on the Electoral Roll every year

One way you can demonstrate your stability to lenders is by making sure you’re consistently registered to vote at your address. Lenders see this as a strong indicator that this address is still accurate as well, so is seen as a big tick by lenders.

As mentioned above, if you’re at uni it might be easiest to stay on the electoral register at your parents’ address, but otherwise you’ll want to make sure that you’re listed on the Electoral Roll with your local council as soon as possible after moving in. You will also be sent a household enquiry form at some point during the second half of the year - even if you’ve recently registered to vote at that address, you’ll still need to fill in your household enquiry form or risk a fine.

Registration can take up to three months (depending on time of year), so it’s recommended to apply ahead of time if you’re registering with a view to applying for credit.

Get rid of any unwanted financial associations

Any financial associations you may have (if you haven’t taken out credit in the past, this is likely to be as a result of applying for a joint account) will also be taken into consideration; if they’ve got a healthy Credit Report this can work in your favour as it means they might be able to support you if you get into financial difficulty. However, if they’ve got a troubled credit history this can work against you as it looks more likely that they may come to rely on you if they need money, which could put pressure on your own repayments.

Before applying for credit it’s worth checking these details are correct on your Credit Report and that you haven’t got any old, no longer relevant financial associations on your file that may hold you back.

Start small and apply for a starter credit card

A good way to build your credit history is to apply for a credit card. It can feel like you’re in a bit of a ‘chicken and egg’ situation if you’ve got a limited credit history because most lenders want evidence of you having managed credit accounts in the past before approving an application. While that might prevent you from applying for cards with the highest limits or offering charitable amounts of cashback right away, there are a large number of credit card providers with products designed specifically for people who fall into this category.

Often referred to as ‘rebuilder’ cards, it’s likely that you will be asked to pay a higher rate of interest than is on offer elsewhere, and will initially be offered a relatively small credit limit (sometimes as low as £200). Used in the right way, these cards can help you establish a credit history relatively quickly – simply pay for a few things each month (even if it’s just a tank of petrol) and clear the balance in full and you won’t pay any interest – and at the same time, the record of paying on time each month will soon build up.

Once you’ve had the card for 6-12 months, made purchases and cleared the balance on time, you should find yourself in a position to apply for a card that offers something more – perhaps a 0% introductory period, rewards or even cashback.

Depending on how you use your card, the card provider retains the right to change your APR even once the account has been opened or raise or lower your credit limit, which is another reason to make payments on time each month!

Make your payments on time

On average, we each have two credit cards to our name in the UK, though for some people this will be a higher number, for others it will be lower. With mortgage payments, car finance and any number of other credit agreements to manage on top of cards, it can be far too easy to forget to pay a bill – something that could hurt your ability to get additional credit in the future.

Setting up a Direct Debit for either the minimum, full or a fixed amount each month (depending on the type of account) is a quick and easy way of ensuring that all payments are made on time and will have a positive effect on your score, while helping you build the kind of credit history lenders want to see.

Given that this payment record will remain visible on your Credit Report for up to six years, it’s a key part of protecting your creditworthiness.

Whatever form of credit you apply for, checking your Credit Report beforehand gives you your best chance of getting accepted and lets you see what lenders will see. If you’re not already signed-up, you can try checkmyfile free for 30 days and then at £14.99 a month after, which you’re free to cancel anytime.

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