What do I need credit for?
In today's world, having credit is a norm, a need, and its a must. Credit is necessary for almost every aspect of modern life. For example, renting a car, buying furniture, buying and renting a house, having plastic surgery, and even having a funeral. Creditors reward you with low-interest rates, better offers, and more credit depending on how responsible you are with money, based on your financial history. Many startup businesses use credit to help secure loans to purchase new equipment, machinery, and to grow their operations. Recurring costs like payroll can also be covered by short-term loans.
In my previous blog post, we looked at what credit scores meant and what creditors look for when considering your application for credit. If you haven't read it, you may want to take a glance here before you continue reading.
Who is this for?
This article is mainly aimed at those who want to build good credit and may not have any form of credit, to begin with. If you are just coming out of University and starting to earn an income, etc., then now may be your first opportunity to really build your credit responsibly. Although this article is not directed to those who have poor credit and want to rebuild, you will also benefit from reading it.
Your credit score is what lenders look at as a requirement for any form of credit or loan, so let’s look at how you can improve your credit so that lenders will offer you good interest rates and better deals on your contracts.
Using a secure credit card to build credit
Secured credit cards can be an excellent way to build credit, especially for those who have bad credit. However, if you are not managing your finances well, as in- not budgeting, not paying your bills on time or behind on bills, then no way should you be obtaining secured or unsecured credit. The reason being - if you can't be responsible for the money you are working so hard for, how will you be responsible for managing money that's been borrowed to you?
So the first lesson is to learn how to be responsible with your money before you build your personal credit with credit cards. Otherwise, you would do more harm to your credit profile before you realise. If you decide to use credit cards to build your credit, then only use a secured credit card between £300-£500 to build your credit. You don't need thousands of pounds in credit to build your credit. Lenders are more interested in you paying on time and maintaining credit utilisation, so there is no need for a £1000 credit card.
Make Payments On-time
When applying for a loan, lenders want to be assured that you are reliable to pay on time and get a return on their investment. Ensure you make all bill payments on time to avoid any financial debt appearing on your credit profile. Any history of late payments can damage your credibility to access credit in the future. The straightforward approach to making payments on time is to pay for everything by direct debit. If you have debt the faster your repayment, the less interest you will pay over time.
Use lenders that report to credit bureaus
Be aware that not all lenders report credit and repayment history to credit agencies. Therefore, ensure your lender reports to credit bureaus to build your credit score with good payment history. It is very difficult to secure a bank loan with a poor credit score. Make enquiries in advance if your intended lender reports to credit agencies or not.
Keep your credit utilisation low
You are bound by a credit limit issued by lenders or banks and the percentage use of your credit limit is your credit utilisation. For instance, if your credit limit is £4,000 and you have used £2,000, your credit utilisation is 50%. Companies and lenders react positively to a lower utilisation percentage. Maintain your credit utilisation low at 30%, of 20% (using the example above this will be £800-, £1200) if possible and never go above your limit, which will also increase your credit score. Reduce your spending to stay within your limit and reduce your utilisation percentage.
Limit your credit applications
Too many applications for credit within a relatively short space of time can give lenders a notion that you are over-dependent on credit and therefore a higher risk and you might not be able to pay the loan on time. It does not matter the amount you are requesting to borrow, and the purpose of the loan as the lending institutions can see every credit history on your profile. Hence, try to give a space between your credit applications. Note that even if your application for credit is rejected, do not be tempted to apply multiple times within short intervals. Rather, give it a wide space of time before submitting your application again. Before you do so, check that the information your credit report is accurate to increase the possibility of granting your application for credit.
Review your credit report monthly
Most lending institutions need the assurance that they will be repaid without delays. One way they manage the risk of repayment is to review your credit ratings with major reporting bureaus. There are three major credit agencies operating in the UK, which are Equifax, Experian and TransUnion. Although they charge for their services, it's possible to get your credit report freely through their partner websites. Review your credit report monthly to minimise the chances of fraud or mistakes and to ensure your details are up to date.
The three UK credit reporting agencies compile data about you from four main sources to send to lenders. These sources include:
Electoral roll information: This is your proof of residence if you are on the electoral register. Therefore, ensure to register your current residence on the electoral roll even if you are in a rented apartment or living with your parents. You can register for the electoral roll on gov.uk. If you have registered, you can check your registration status with your local authority here.
Court records: The agencies check whether or not you have any County Court Judgments (CCJs) fines that are not paid fully within one month of receiving the notice. CCJs not settled within 28 days can appear on your profile for up to six years and dent your credit history.
Search, address and linked data and debts: Include details about your financial debts, late/missed repayments, credit applications, bankruptcy, Individual Voluntary Arrangements as well as individuals you are linked with; be it living at the same address or having a joint account.
Account data: Name, address and date of birth which reverifies your identity.
Different lenders have their standards for rating credit scores. It's is important to check in with all three agencies to have an overall report of your finances. So, don't assume the information will be the same on each. A good credit score benchmark is above 420 out of 700 for Equifax, above 880 out of 999 for Experian, and above 4 out of 5 for TransUnion.
Monitor Your Credit Scores and Ratings
Building your credit profile isn't something that can be done overnight. New updates on your credit file can affect your scores negatively or positively. You should work towards establishing and maintaining reputable scores to be at the forefront when a lender pulls up your credit report. Remember, that when you are building your credit, it could be reported in one agency and not appear on the other agencies. So, you have to ensure your credit score is reported with all the three bureaus in the UK – Equifax, Experian and TransUnion. You can also subscribe for an alert to get notified when your record changes, so you can quickly correct any issues.
Report and fix any mistake on your credit profile
If you discover any mistake from lenders on your file, report immediately to the credit reference agency. They have 28 days to correct the information or tell you the reason why they don't agree with you. During the 28 days, your complaint will be marked as "dispute". Information is transferred from the lenders to the credit reference bureaus which they rely upon to build the credit report. Thus, the lender is in the best position to resolve any error or complaint, so try to contact them first. If there is any new development about your working status, for instance, maybe you got a higher paying job, you can also send a notice of correction to your credit report.
Build your credit with retail therapy
You can apply for a store card at your favourite retail store with a low limit like £50-£100a month, and use this to buy your clothes every month. By keeping the limit low, you can be sure to pay it off in full each month, in line with your current budget. At the same time, you can also enjoy some retail therapy, without having to take on the burden of debt to build up your credit rating. As long as you stay within your limit and pay your bills on time, this type of credit can be beneficial - but remember to do so responsibly.
Don't co-sign or be a guarantor for anyone
Often, if your credit is bad, creditors will decide to give you credit on the basis that somebody who has good credit makes a legal commitment to repay your debt if you are unable to. Not only should you never co-sign for anyone, but you also should never put that burden on anyone else. Having credit will never be a life and death situation, where someone else puts their neck on the line. Have you heard of stories where friends, family and colleagues have co-signed for student loans and mortgages, only for that person to find themselves in a position where they can no longer make payments, have an accident and or worst case, they die. In such cases, the co-signer, or guarantor has to pick up the pieces. To be fair, the UK it's not as bad as the USA where the student loans are equivalent to mortgages. However, guarantor loans could still leave you financially handicapped if you can't pay or end up paying for someone else's debt! After all, you signed for them.
To finish off
Although we must build credit so that we get the best offers for services and products, it's also essential that this is done responsibly - otherwise, the opposite can happen. In building your credit, there is the risk you take on more debt, which can result in the derailing of your financial goals. If you need advice or guidance on building your credit, you can register with any of the credit bureaus Equifax, Experian, and TransUnion to seek further assistance. If you find that you are overspending and not able to stick to your budget, you may want to consider joining our next budgeting workshop, the details of which you can find below.