How to get credit for the first time
At some point in your life, you will probably like or need to apply for credit, which comes in many forms including a loan, credit card, overdraft, store card or mortgage. But apply for credit and being accepted for credit will always be determined by your credit score and your credit history.
What is a credit score, and why do you need it?
Everyone has a credit score. A person who has a good repayment history, who has taken and repaid credit over time will most likely have a good credit score, which is represented by a number. This number will be lower if repayments have been missed, or credit not even taken. A high or low number, good or bad credit rating ultimately defines how lendable you are, and how much of a risk it is to the to provide you with credit.
Your score will determine:
- The amount of money you can borrow
- How high the interest will be
- Whether the lender is likely to lend you money at all
A good credit score will be based partly on your credit history, which is a record of how much you’ve borrowed, how well you have managed repayments, and whether you have been in debt.
It's important to build a good credit score before searching for the best deals on the market.
Ways to build a good credit history
There are some simple steps you can take to start building a credit history.
Bank account, open one!
To build a credit history, you first need the facility to manage, spend and make repayments. Running a bank account responsibly is an important part of building a good credit history as it shows your ability to manage financials and make on time repayments.
Opening and managing a current account responsibly will help your credit rating even if the account doesn’t include an overdraft.
Set up and pay Direct Debits
By setting up Direct Debits for regular payments, such as utility bills or your car insurance, and then making sure the arranged payments are successfully met, you will be improving your credit rating as it helps to prove how “lendable” you are, and reduces your “risk rating”
On the other hand missing a payment will count against you, and if the matter escalates to the lender having to go to court to recover any money, then a county court judgment (or decree in Scotland) could be issued against you, which will severely affect your ability to get credit and it will remain on your file for six years.
Are you on the electoral register?
use the electoral register to ensure you live at the address you give during you application, as it has to be correct when you register to vote.
If you have not got around to adding yourself to the electoral register, it's wise to do so.
How your credit rating affects the interest rate you’re charged
Your credit rating may also influence the rate of interest you are charged on any borrowing.
Who works out your credit score?
Technically, you don't have a single number or credit score which represents you financially. Each lender will use their own policies and preferred information when calculating your credit score, or borrowing risk.
When an application is made for credit, most lenders will perform a check against the information held with one of a number of credit referencing agencies.
There are a number of companies, such as www.creditangel.co.uk, who provide a range of services to help you manage and improve your credit score, and usually offer a free trial to help you get started.* It's a great way to make sure your credit report is accurate and up to date before making an application for credit.
When you are happy with your credit score, the accuracy of your details and your financial situation, it's still wise to shop around to find the most suitable credit product for you, and making you own assessment on how affordable the repayments will be.
Applying for credit
So you are all set, you have nurtured your credit score and done what you can to improve it. The next step is to apply with your chosen lender, but make sure you have the following details to hand to make the application run smoothly:
- Employer’s name and address
- Bank or building society account details
- Detailed list of income and outgoings
- Details of any existing credit commitment
*Credit Angel offer a 30 day free trial. A Monthly fee of £14.99 applies after your free trial. You may cancel anytime during your 30 days free trial without charge.