Credit Clinic

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 purchases 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 your 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.

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 VantageScore 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?

It 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:

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 the following:

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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