Building your credit history from scratch can be an extensive task. Your employment, your home, your expenses, your lifestyle – everything impacts your credit. What makes credit history so important? What impact does it have on your credit score? In this article, we will discuss the impact your credit history has on your finances and how to build credit for the first time.
If you’ve been planning to take out a loan or applying for credit, then you must be well versed with the term Credit History. Your credit history is a key contributor in your credit report, hence, your credit score. Along with other factors like income, lenders assess your credit history to approve or deny your loan application.
What if you only moved to the UK recently and do not know have a credit history in the country at all? At some point, you may need to apply for a mortgage or some form of personal credit. Without a credit history, your chances of approval will be slim to none. On the other hand, if you work on building a credit history, not only will you have access to all financial products, you will also get deals with better interest rates.
In this article, we’ve covered all aspects of credit, from the importance of credit history to steps for building one.
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What is a credit history and why is it important?
- If you’ve ever applied for credit before and been rejected, you may have wondered the reason behind your rejection. A rejection makes sense for someone with a bad credit score and a history of defaults. But what happens when someone applying for credit for the very first time, is denied a loan? Let us understand how credit history plays a role in this.
- When you apply for a loan, lenders assess your creditworthiness – how likely are you to repay the loan. The interest that they charge you on the loan also depends upon this. Lenders generally want to know how much of a credit risk you can be before they lend the money. This is because lenders too, possess a limited fund and they can’t risk lending it to someone likely to default.
- While all lenders use their own set of criteria to evaluate an application, credit history is a common denominator. Your credit history will help them see whether or not you’ve demonstrated responsible credit behaviour in the past.
- There are many reasons for not having a credit history. For instance, you could be a financially self-reliant individual, with no history of borrowing – which is a milestone people aspire to reach. Even if you’ve always been a sagacious spender, avoiding debt, lenders look at your credit history to see how responsibly you manage your debt.
What do you need a credit history for?
- It’s a given that credit history is required to avail of most of the financial products like personal loans or mortgage. But sometimes, you may even be required to present credit history to benefit from basic products like a ‘pay monthly’ mobile phone contract or a direct debit payment plan for utility bills. Although the options available will be limited, it’s not entirely impossible to get a credit card without some credit history.
- Sometimes, financing a product such as a car or an expensive laptop, makes it easier for us to purchase. However, having a credit history is imperative to avail of this option. The vendor will run a thorough credit check on your profile, before approving you for financing.
- A good way to check whether or not you have a credit history is to keep an eye on your credit report. It is important to scrutinize your credit report regularly, to check all if all your credit interactions are being recorded. This practice also helps you identify any discrepancies in your report that may lead to identity theft.
What is a credit score and how does your credit history affect it?
Your credit score is a three-digit number through which lenders determine your reliability and creditworthiness. This score is assigned to you by Credit Rating Agencies (CRAs), like Equifax, TransUnion, and Experian, based on your past behavior with credit.
Based on the data compiled in your credit report along with the additional information that you submit with your application, lenders deploy mathematical calculations to conclude a score that would represent your credit history. This score helps them in determining how responsible your behavior is with credit.
Essentially, your credit score takes into account:
- Name, address, and date-of-birth.
- Past credit applications.
- Credit repayment history, including late or missed payments.
- Your existing debt.
- Your electoral register presence.
- Any joint credit cards or loans.
- If you’ve been declared bankrupt or have an IVA.
- Any County Court Judgments (CCJs).
- Current account turnover.
Who calculates credit scores?
Credit Rating Agencies such as TransUnion, Equifax, and Experian use mathematical models to calculate a person’s credit score. Below is a table that classifies a range of credit scores as Excellent, Good, Fait, Poor, or Very Poor, using models deployed by the aforementioned CRAs.
| Agency | Score | Rating |
|---|---|---|
| Experian | 0-560 561-720 721-880 881-960 961-999 |
Very poor Poor Fair Good Excellent |
| Equifax | 0-279 280-379 380-419 420-465 466-700 |
Very poor Poor Fair Good Excellent |
| TransUnion | 0-550 561-565 566-603 604-627 628-710 |
Very poor Poor Fair Good Excellent |
How to build credit for the first time in the UK?
Building credit for the first time can be an arduous task. Here are some steps to guide you in building your credit history from scratch:
- Get a UK address: If you’re new to the UK, getting a permanent address should be the first thing on your list. A residential address in the UK will anyway be the common denominator across all your credit accounts. Credit agencies will use your address as confirmation of your identity, and to cross-match your credit information. Your frequency of moving houses could have an indirect impact on your credit score. CRAs use your address to assess your credit behavior. If you move too often, it implies that you lack stability, which may pose as a potential issue with lenders.
- Open and manage a UK bank account: Setting up a UK bank account and using it responsibly can be of great help in establishing your credit history. Once you open your account, ensure that it has enough money to cover your payments, at all times. This practice will help you build a better relationship with your bank, demonstrating responsible credit behavior. If you fall short of some cash, some banks allow their customers to avail overdrafts that are interest-free for the first 12 months. This could come in handy when you only require a small amount of money and don’t want to undertake a debt. However, to build a positive credit history, ensure that repay the debt in full and on time. Even without an overdraft, having a UK bank account and managing transactions through it can give your score a boost.
- Obtain proof of employment: Getting a paycheck every month helps you in establishing your affordability. Having a job would show CRAs and lenders alike that you have the resources to repay a debt. Although the amount of loan that you get approved for may vary depending on your salary.
- Set up Direct Debits: Direct Debits are a great way to show to banks and CRAs that you can repay the money on time. Consider setting up Direct Debit for your bills such as phone, rent, gas or electricity, or credit card bills and loan installments. Setting up a Direct Debit will help you avoid missed payments. Whenever a payment is due, your Direct Debit account will automatically deduct the money to make the payment. Moreover, several services offer attractive discounts on payments made via Direct Debit. It’s a win-win!
- Get yourself enrolled on the electoral register: Exercising your right to democracy can prove to be more beneficial than you thought. When you enroll in the electoral register, your details are recorded in the credit report. This legal confirmation of your details helps in boosting your credit history, sometimes even within 20 days of enrollment.
- Close all obsolete accounts: A neat and organized financial statement is always preferred over a scattered one. Closing bank accounts that you no longer use, is a good start towards organizing your finances. This will make it easier for lenders to assess your suitability with credit.
In conclusion
- Once you follow these steps correctly, you will be able to build a substantial credit history over a period. You can now freely apply for credit or loans. However, it is imperative to take all factors into accounts, such as your income and affordability, before applying for a loan. Shop around and look for the best option that fits your needs and budget.
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