Establishing a credit rating when you have zero history

When you are young and just starting out in the world, you may have absolutely no credit history at all, making it tougher for you to obtain your first loan or credit card. If this is you, try some of the following tips:

  1. Get your first batch of credit in place – you can do this by asking someone to co-sign a loan in your name or add you as an authorised user to a credit card account that they already have or even open a joint credit card account with them.
  2. Ask your landlord/utility companies if they can possibly report your good payment history to any of the credit agencies.
  3. Get the company that you are asking for credit from to request from Experian your Extended View score or Vantage Score if using any of the other agencies; this will give them a much more detailed view of your financial dealings to date.

Is it possible to build credit fast?

This is something that you cannot really rush as building a good credit file takes time and there is no one thing that will cause this to happen quickly. Your credit rating will begin to build up as you make more and more on-time credit payments, with each of them being reported every 30-60 days. It is a case of slow and steady so just focus on paying all bills on time each month, using a balanced mix of credit and keeping an eye on your credit utilisation ratio by not over-spending on your credit card.

The basics of how credit works

Your credit report and overall score provide a snapshot of how well you are managing your finances over a set period. If you are able to build a good credit report then then will find yourself in a much better position when it comes to things such as applying for loans or credit cards – you will find that you are able to improve your lifestyle once you have good credit and can use it when needed, such as if leasing a car or paying for emergency bills like vehicle breakdowns or utilities not working. But it cannot be emphasised enough that you need to manage your credit well and keep paying the agreed sums off each month as they become due. Late or missed payments will mean negative marks on your credit file and if you overspend using credit cards or loans, you may even find yourself in debt and unable to meet your monthly payments. Once you get into this predicament it is hard to recover and will take time.

But how do the rules of credit work?

IIt is really quite simple and follows these simple steps:

  1. A lender provides you with a line of credit at an agreed sum.
  2. You enter into an agreement to pay the lender back the sum borrowed plus interest/service fees.
  3. A payment schedule is put in place and you must make payments following the plan.
  4. Paying your bills on time and in full is vitally important.

What types of credit exist?

Credit available to consumers (i.e. the general public as opposed to companies or corporations) usually comes in the following forms:

  1. Revolving credit – this is open-ended and the amount borrowed can vary i.e. you agree to pay a set sum each month but don’t have to pay back all the money borrowed by a set date. You will be allowed to carry a balance forward and add to it by borrowing more up to a pre-set limited. The longer you take to pay back the debt the more interest you will pay. Credit cards follow this pattern.
  2. Charge cards – similar to a credit card but you have to pay the full balance off completely each month.
  3. Service credit – this is when you are billed in arrears, after you have received the goods or service. This can cover things such as utilities, rent, mobile phones etc. You pay an agreed sum each month. This will not normally show on your credit report but if you fail to pay, you could end up with late payments, collection agencies getting involved and then negative information will show on your credit file, damaging your score.
  4. Credit paid in instalments – such as a car loan or a mortgage. Very commonly used and usually fairly easy to comprehend, you borrow a sum from a lender and pay it back to them with interest added in instalments of a set sum. This will be for the life of the loan, which can be a few months or years, depending upon what term you choose.

How to understand your credit report

As we have already explained, your credit report shows a snapshot of your credit history and payments over a certain period of time. Three major credit reporting agencies provide their own report on your credit each month and by going onto their sites online, you can look at your file and make sure that it is in good condition. The three key sites are:

  1. https://www.experian.co.uk/
  2. https://www.equifax.co.uk
  3. https://www.clearscore.com

Whichever report you look at, it will show pretty much the same type of information such as:

  1. Account information – this is a list of all open credit accounts· Enquiries with regard to credit – if you have made applications for credit or finance then these will be shown unless they are ‘soft’ searches which do not leave a trace. ‘Hard’ searches will show and too many can have a detrimental effect so if you make one and get turned down, think again before applying too quickly. It may be best to focus on applications that are regarded as soft searches only.
  2. Information with regard to public records – this will be things such as information from the courts appertaining to bankruptcy or judgments made. Anything such as this will impact negatively upon your credit file.
  3. Credit paid in instalments – such as a car loan or a mortgage. Very commonly used and usually fairly easy to comprehend, you borrow a sum from a lender and pay it back to them with interest added in instalments of a set sum. This will be for the life of the loan, which can be a few months or years, depending upon what term you choose.
  4. If you look at your credit report and find inaccuracies, contact the relevant reporting agency and ask them to correct it. Focus on paying down high balances and if payments have been delayed or late, get them back into order and totally paid up-to-date.

What about a credit score – how does this work?

Your credit score is a number shown on your credit report and is used by lenders to assess you financially before providing you with any type of finance. It would be great if all of the credit agencies used the same scoring method but they don’t, so you may end up with three different scores, all calculated differently.

Various things impact upon your credit score so if you want to keep it as pristine as possible, you should pay attention to your:

  1. Amounts of recent credit applied for (credit cards, loans)
  2. Credit utilisation ratios
  3. Information shown in public records such as bankruptcies or County Court Judgments
  4. Length of time you have been using credit
  5. Payment history
  6. Total balance across all debts
  7. Type of credit used

How can you avoid messing up your credit rating?

If you never take the time to check your credit score or don’t understand the way your report is compiled, it can be easy to make mistakes that will drag your credit rating down. Here are the key ones to look out for and avoid:

  1. Not knowing what you can afford – it is a good idea to calculate your debt-to-income ratio and not let is rise above 43%; this is the total of all of your monthly debts divided by your total income per month. If this gets too high, you may find yourself struggling to make payments.
  2. Not having a budget in place – it makes a great difference if you know you much you spend and receive each month. You can then decide whether or not to take on board more credit and even whether you can afford to save.
  3. Not shopping around for the best instalment loans – too often people jump at the first loan they see or are offered instead of looking for the best terms. Always do your homework and shop for the best deal; comparison sites are great for doing this so that you can compare fees, any service charges and interest rates.
  4. Not doing enough to prevent yourself being affected by fraud – never be complacent about this. Check your statements each month and frequently look at your credit report. Keep credit cards safely and not with details of your pin numbers. Shred statements and receipts and anything that shows your account number.
  5. Applying for too many credit cards or loans in a short time – taking on too much debt in a short time will be seen as a sign that you are using more credit than you can deal with or pay. If this bumps up your balance-to-limit ratio and the number of ‘hard’ enquiries made upon your file, your credit score will be impacted upon negatively. Remember that each hard search shows, whether or not you are successful.
  6. So as you can see, credit can be a great tool if utilised carefully, thoughtfully and after carrying out sufficient research. Most of all, once you understand how it works you can ensure that not only are you using credit correctly but that your good credit rating is preserved by paying on time and in full each month.
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