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Moving home can be difficult especially when it comes to building credit or borrowing money. Why? Because of a lack of credit history. This makes it difficult for lenders to determine whether you can manage credit responsibly, and therefore you may be classed as high risk, making many lenders reluctant to lend to you. Due to this you may find it hard to obtain credit cards, loans or mortgages, which can be very frustrating for those trying to climb the property ladder. Fortunately, there are some easy steps you can take to build up a good credit rating. By reading this guide you can take the first steps towards financial freedom.
How Does Credit Rating Work?
When you apply for credit with a company in the UK, it will (with your consent) check your UK credit score through a credit reference agency. The three main ones in the UK being; Experian, Equifax and Call Credit. The information about your credit status is supplied by banks, finance companies, credit card suppliers, etc. For example, if you have missed any payments or go bankrupt, this will all be recorded on your credit report. So, this report shows how you have repaid credit in the past, and therefore lenders will be able to determine how you will repay credit in the future. If you have little or no record of repaying credit in the past, it will be more difficult for lenders to resolve whether you will be a high risk client or not.
If however you do have a good credit history, you will be able to access a wide range of credit products, with improved rates. A poor or small credit history will limit this choice and usually means that you'll have to borrow at higher rates. Still, you will be able to build up your credit history over time.
Many lenders like to see proof of a regular income; although the importance of this differs for each lender. Therefore, if you have an irregular income for any reason, it may become difficult to obtain credit. For this reason, it would be wise to try and secure employment with a regular income, as this will make taking out a mortgage and opening a bank account much easier.
Opening a bank account
Opening a bank account is not absolutely essential when it comes to applying for credit, but it can make you more attractive to lenders. It also means that you can pay bills by direct debit, receive your salary and transfer money abroad. Securing employment is also a good idea, because banks like to see a letter of employment when you open an account with them.
Building up and Managing your Credit Rating in Six Easy Steps
Step one: Register on the electoral roll
In the UK, the electoral roll is an official list of the people in a district who are entitled to vote in an election. It is only possible to register on the electoral roll if you have a UK address, are a citizen of the Republic of Ireland, the Commonwealth, the European Union or Britain. A lot of companies use the electoral roll for verification, as a way to combat identity fraud. To register on it, you will generally need to complete a voter registration form and return it to the local council where you have your UK address.
Your credit report also contains a record of where you live now and where you may have lived previously. You will need to update any companies you have credit with a change of address, and ensure that for each property, you get registered on the electoral roll. It is also worth noting that you should try not to move too often as this could have a bad affect on your credit score.
Step two: Stop applying for credit you won't get
Every time you make an application for credit, a credit search is conducted which is then recorded on your credit report. So, if you have been rejected several times when applying for credit, your credit score might be getting worse instead of getting better. Therefore, try to only apply for credit you are likely to get, rather than for credit you probably won't receive. Even if this means borrowing at higher rates at first to build up a credit history.
Step three: Check your credit report
You may have already been able to build up some credit history, and so it would be a good idea for you to check your report before applying for more credit. By doing so, the information shown on your credit report will be able to show you areas on which you can improve, and check for any mistakes on your report. Even simple mistakes such as an incorrect present or past address can have a negative impact on your credit history. If you do notice a mistake, make sure to write to the agency you obtained your report from and request that it is changed. If the credit agency refuses to make the change, you can request them to add a Notice of Correction stating the mistake.
Step four: Create some positive credit history
Whether you have no credit history, or just a poor rating, you can start to show that you can manage credit responsibly by:
1. Opening a higher interest credit card makes you more likely to be accepted. You must make sure that you manage it properly to help you rebuild your credit rating. You can do this by; repaying every month in full, and spending a little for six to twelve months. This method may only work if you are using your credit card for purchases, as is the case with most credit cards. It is really important that you make your payments on time and stay within your credit limit, otherwise it will have a negative effect on your credit rating.
Here are some examples of higher interest cards - rates correct at time of writing but please check with each provider:
- The aqua Card: Typical 35.9% APR variable and up to 51 days interest free credit on purchases if you pay off your balance in full and on time each month
- The Capital One Classic: Typical 34.9% APR variable
- The Barclaycard Initial: Typical 27.9% APR variable
2. Putting bills in your name (where possible) and paying them by direct debit.
3. Store cards are usually easier to open and easier to get than standard rate credit cards. However, you must be able to pay them off in full every month to show that you can handle credit responsibly. If you are bad at managing finances, and you miss payments regularly, do not use this method, as it will have a negative effect on your credit rating.
Step five: Timing your applications
Being rejected for credit often in a short space of time is not healthy for your credit rating. Try leaving between 3 and 6 months (may take longer) between applications to help repair your credit rating. Things such as mobile phone contracts and car insurance can also count towards this.
Step six: Curb your card spending
It is important to minimise any debt on your cards. Try to keep the debt on a card under 50% of your credit limit.