In a perfect world no one would need credit. People would have enough time to earn and save the money required for buying things like a car or a house. Credit cards would only be used for the benefits they can provide such as cash back rewards and other bonuses, and we would never have to pay any interest. There would be no such thing as a credit history or credit report.
Unfortunately, this is not the case, and most people need to borrow money to make these large purchases. In order to qualify for the best interest rates the market has to offer, lenders reward people with the best credit history offering them access to these products.
It doesn’t stop there, as you may be surprised to learn that some employers and landlords check your credit history before offering jobs and rented property. In today’s society, there are few ways of escaping the need for credit.
How your score is generated
Whether you’re looking to take out a loan, mortgage, overdraft, credit card, contract mobile phone, utility bills or even monthly car insurance, every type of lender ‘scores’ you to predict your likely behaviour, in order to build up a profile to indicate how financially attractive you are.
In many cases if you miss a periodic bill or make a payment after the agreed date, it will have a negative affect on your score.
Banks use a number of pieces of information when coming to a decision as to whether they will lend to you, including data held by three companies known as ‘credit reference agencies’: Experian, Equifax and Callcredit.
If you have no experience with credit, you are unlikely to have a credit history, which can work against you when looking to borrow. This is because lenders want to know that you can be trusted when giving you credit, which is usually done by using your previous track record.
Building a good score
There are several ways to both improve and repair your credit score, so if you suffer from poor credit history then help is at hand.
Begin using a credit card. While this is sometimes dangerous advice, using a credit card and paying the balance in full each month for at least six months gives you a head start in your credit history.
First-time credit card holders are unlikely to qualify for the best credit card deals, so you may find it easier to be accepted if you apply for cards with higher than average rates, such as the Vanquis card. This these types of card are known as bad credit cards – don’t be put off by these high rates, as you won’t have to pay them if you stick to the plan, and several rejected credit card applications can have a bad effect on your credit score, so keep it simple.
The most important factor when building a good credit card is to always pay your bills on time. Start using your card to pay for some of the things you would have paid for using cash or a bank card, while putting the money aside to cover the bill at the end of the month. If your credit card balance is cleared each month without fail, you won’t have to pay a penny for using the card, and you will be building up a valuable score.
If you are unable to pay off the balance in full every month, always pay at least the minimum repayment. Even if you’re struggling, don’t default or miss payments, as doing this once or twice can cause problems that haunt you for years. The same applies to your mortgage payments.
If you are have difficulties with your payment plan, the best thing you can do is speak to your lender. You may be able to change your repayment schedule rather than defaulting and could help you to avoid a County Court Judgement (CCJ) being filed against you.
The easiest and most effective method for ensuring your credit cards are paid on time, set up a monthly Direct Debit.
Keep an eye on your score
Check your credit reports periodically. If possible, it’s worth checking all three agencies, as there’s no harm in doing so and will only cost you the price of the report. checking your file doesn’t add a ‘credit search’ that a lender can see, so it won’t have an impact on your score. Make sure you check each entry in your report as there could be an error that might be causing problems. It’s a good idea to repeat your check-up every year to 18 months, and always do one in good time before making any important applications.
If you don’t like the idea of paying to see your credit report, you can get access to a simplified version for free by signing up to a monthly trials. This does require you to set up a Direct Debit or regular credit card payment, but you have the option to close your account before this period expires.
If you find an entry on your file that you disagree with, you can request it to be changed by writing to the agency. These amendments can be refused, but you are entitled to add your own comments as a ‘notice of correction’. This is likely to make future credit applications take longer, but can help in your quest for being accepted for the better deals.
If you do feel something doesn’t look right, make sure you’re concise, explanatory and factual when detailing the error, and avoid writing something too wordy.
While there is no an exact science to improving your credit score, there are a number of things you can do to sway lenders’ attitudes towards you.
Sign up to the electoral roll.
If you’re not on the roll, you’re unlikely to obtain any credit, so this is a must. You needn’t wait for the annual reminder, you can sign up at any time using the About my vote website.
For anyone that is not eligible to vote (foreign nationals, etc), it is worth sending each of the credit reference agencies proof of residency and request that a note is added to verify this.
Space out your applications.
Making too many applications in a short space of time can have a bad effect on your score, as each time you apply, credit searches are triggered. You should therefore space out applications, not only for credit but also for things like car insurance, mobile phones and other similar contracts.
Moving house will also disrupt your score , so make any important applications before you move. If you’re thinking of moving to England, chances are you will need to start building up a credit score, so read on. Your score will also be better when you’re earning a salary, so if you’re planning to take time off, go on maternity leave or suspect potential redundancy, make any applications beforehand.
Joint finances can effect your score
If you marrying or are living with someone that has a bad credit score it shouldn’t impact your finances, providing the third-party data doesn’t appear on your file.
However, if you’re ‘financially linked’ to someone on any product who has a bad score, such as a mortgage or a joint bank account, it can have an impact. Simply opening a joint bills account for flat sharers can mean you’re co-scored.
If one partner has a bad credit history, keep your finances separate where possible and the other should maintain their good score.