How to create a good credit rating and keep it that way

You may not give too much thought to your credit rating until you apply for a credit card or loan. At this point, the lender will look at your credit report and based upon your score, will decide whether or not to offer you their product. If you have managed your credit rating well in the past, you should have no problems. However, if there have been issues, you may be surprised to find yourself refused or offered a much higher rate of interest. If you have no credit report at all i.e. you have never used credit in the past, even this can create problems as it does take time and effort to build and maintain a good credit rating. Rather than find yourself in this predicament, the best thing to do is take a look at your credit report now and be proactive when it comes to building or repairing it.

Building credit using a credit card

If you use a credit card wisely then this can enable you to build a good credit rating. However, you must not overspend or miss regular monthly payments or this will have an adverse effect. Try these four ways of building credit using a credit card:

  1. Open a credit card account – this is the first step to building a credit history. If you think your credit history may be a little limited, go for one of the cards with a lower spending limit as you will qualify much easier for this. Once you get your card, don’t over-use it but make small purchase that you can pay off monthly, clearing the balance. This will improve your credit profile, illustrating that you are a responsible user.
  2. .Look at getting a secured credit card – these are good if your credit history is already a little negative and getting a regular card is not likely to be easy. Secured credit cards are usually linked to a savings account with the limit being tied to the amount of money in it. You can then use this to build credit by keeping the balance low (or even at zero) and clearing it off each month. If your particular lender will not be showing your secured credit card on your credit file, before you proceed, ask if they can convert it to a regular card after a period of you using it carefully.
  3. Open a joint account or be added as an authorised user – if you are struggling to get a credit card in your name, you can be added to one being used by someone with a good credit history. Parents often do this for their children, enabling them to get used to handling a card whilst building some credit. Once you have their permission and have been added, you will both be legally responsible for paying any charges on the card. As it will be a joint account, if one of you misses a payment or overspends, both of you will be affected negatively and your credit reports will take a hit. For this reason, always treat being added to someone’s account as a serious matter.
  4. Ask for an increase on your credit limit – you can do this once you have had a card for a while and shown that you can use it responsibly. Some lenders do this automatically once they can see you are trustworthy. The amount of credit you are allowed is calculated by the lender looking at how much credit you currently have and how much you use. The lower the ratio, the better your score. As an example, if you have £1000 credit limit and never go above a balance of £200 with our spending, your credit utilisation ratio is 20%. Once you get a limit increase, this ratio will be even lower so will boost your credit score. The hitch here is not to go up to the new credit limit just because you have it as it is essential to keep the ratio low. If you already have a high balance on your card and ask for a limit increase, you may not get a positive response as they may feel that you will simply add more debt, dragging down your credit score. So as you can see, it is somewhat of a chicken-and-egg scenario.

What is a good Credit Score?

A FICO Score between 670 and 739 is considered to be good and is within the median score range. A FICO Score above 800 indicates an exceptional score and consumers in this range may have more favourable terms and an easier approval process with new credit applications.

Can you build credit without a credit card?

Yes you can. Your credit report is purely an overview of how you manage your credit and this includes all types of accounts. Here are five ways that you can try to build your credit without a credit card:

  1. Manage your student loan well – your loan will be reported to the credit agencies so make sure that you don’t miss any monthly payments as arrears will be flagged up as a black mark; paying on time on a regular basis will help to go towards building your credit.
  2. Get a car loan – if you need a car then taking out a loan and paying it off on time will help to build your credit. Often easy to obtain, look for the best interest rates and once you are accepted and have received the funds, make it a surety that you pay when you need to. You may want to take out a standing order or direct debit to make sure that payments are never missed. If you are struggling to find a loan in your own name, talk to a family member or friend and see if they will act as a co-signer, sharing part responsibility for the payments. All types of instalment loans such as this help to build your credit rating, including personal loans and mortgages.
  3. Get a secured loan – lenders appreciate that it is not always easy to build credit when you are only just beginning, particularly if you have zero history to date or negative marks on your credit file. In order to help with this, some will provide you with a loan that is secured i.e. you put a sum of money into a savings account and then borrow against that. The deposit acts as collateral and although you will receive interest on it, the amount of interest you pay will be greater. You may be able to use an existing bank account or may need to open a new one, dependent upon which lender you choose. Check with the lender that your regular monthly payments will show on your credit file before you sign on the dotted line.
  4. Look at using a non-profit lending circle – often referred to as credit unions, they can help you to obtain finance whilst building up your credit, reporting your positive payment back to the credit agencies.
  5. Get your good credit reported where possible – as long as you regularly pay your bills on time, you can prove that your track record is a good one. With this in mind, ask for your credit to be reported based upon this. Although things like rent and utilities don’t usually show on your credit report (unless you build up a debt and a debt agency is involved) some companies such as Experian can show them. Try asking your landlord if they can report your on-time rental payments to the credit agencies. Experian provide something called an Extended View Credit Score which provides lenders with a much more detailed overview of the way you manage your credit and rental/utility payments or similar should show on this; in cases where you are struggling to get something like a car loan, you could then try asking the lender to ask for an Extended View report from Experian.
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