Under Construction: How to build a good credit history. — Part I (Money Talks Series)

More info on Money Talks? See here: About Money Talks

The C word. Ahhh. Credit is money borrowed from a lender in order to pay for goods and services. It is repayable with interest after a given timeframe. Examples of credit include credit and store cards; hire purchase agreements and loans. Some of the most common types of credit also include overdrafts and mobile phone contracts.

An increasing population of U.K. adults are likely to have a low credit score to no fault of their own. Amongst milenials this could simply be the case of not having used credit long enough (or at all!). In the case of migrant workers and new visitors the root cause of not having been in the country long enough to build up a track record becomes more obvious.

Whether the concepts are new to you or you are a more experienced spender have a read on how you can improve your credit score!

Why build credit history:

Every adult in the U.K. will have a credit file. This is an entry with the three main Credit Reference Agencies (CRA’s). Say hello to: Experian; Equifax and CallCredit. An individual’s credit file will contain data on accounts held with banks/lenders (this could include utilities such as BT) and payment history (on time/late.)

Information held by CRA’s are used by a large number of service providers including banks, mobile phone networks and insurers... even landlords! Credit file data is even used by recruitment teams for certain job roles. In short it pays to keep tabs on your credit history.

Getting to work- Building:

Read your credit file!

Everyone has the right to view the information held by CRA’s about them. Better yet, this is free to do! You can either request a statutory credit report through the post by writing to one of the CRA’s with a £2 fee.

Otherwise there are a range of services online which allow you to view your credit report for free or paid subscription. These platforms are free because they recieve money from displaying targeted adverts to products. These are targeted to you based on your percieved credit score. It’s worth bearing in mind that your credit score is not the same everywhere you go. Different platforms (and lenders) have their own scoring criteria. 999 at Experian could be 888 at Equifax!

It’s also worth signing up to more than one platform as they all gather their data from various CRA’s. Not all lenders report the same information to all the CRA’s so information held may vary slightly across the board.

Try: Noddle (Source: CallCredit); MSE Credit Club (Source: Experian) and Clearscore (Source: Equifax)

Make sure you’re on the electoral roll

Ensure you are on the electoral roll if you haven’t already. In any case this is legal requirement as the electoral roll is used to verify your identity for a whole host of reasons. This is also a key source of information for CRA’s. However you cannot register if you’re in the U.K. illegally. Register here.

Watch your credit utilisation

Credit utilisation ratio refers to the amount of credit used in relation to overall credit available at a given time. For example: Jan has a Barclaycard (£400 limit); American Express (£600 limit) and CapitalOne (£5000 limit). Now Jan has run up a balance of £380 — £600- £4500 respectively across her cards.

If we add up her total availible credit (£6000) and the amount used (£5480) her credit utilisation is 91% of her availble credit. Credit utilisation is a very useful and common scoring criteria assessed by lenders. If your credit utilisation is too low it suggests that they will be unlikely to benefit from providing you with an account. Likewise if your credit utilisation is too high this would suggest to lenders that you are over reliant on credit and may be at risk of defaulting at a later point.

Ideally credit utilisation should hover around the 30% mark.

Credit builder cards

A number of credit cards exist for the sole purpose of helping customers build up a strong credit profile or repair a damaged credit history. Reputable companies such as Vanquis Bank, Barclaycard and Capital One all offer reliable products. Due to the slightly higher interest rates on these cards it is important to use them properly. This means making payments on time and above the minimum payment where possible.

From experience, I would make the majority of my monthly purchases on the card which I know I would have paid out of my bank account anyway. This sum, I’d repay in full each month avoiding any charges or additional interest.

Soon after demonstrating creditworthiness with these cards you can apply for better cards. I’d recommend NOT closing the card straight away after getting a new card though, bearing in mind the point about credit utilisation made above. Provided you keep your balances low it’s perfectly acceptable to manage an old credit builder card and a normal one side by side.

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I hope you found this blog post useful in planning your next steps towards strengthening your credit score. Most importantly check out Part II to this article here!

If you have any questions; suggestions or tips please do DM me on Twitter @Dejrw or email: Jon@heyjrw.co.uk