Building credit takes time, so it's crucial that you start early, before you need it.
But here’s the thing: To do it, you need a lender to provide you with credit. And if you don’t have a history of responsible repayment (i.e., a good credit score), it’s going to be tough to get a credit card or a loan to show you’re capable of making those payments.
Talk about a catch-22 situation!
That’s why it’s important that you’re proactive and follow these six steps as soon as possible:
How to Build Your Credit Score from Scratch in 6 Simple Steps
These steps assume that you have a bank account set up. If you don’t, you should. An active UK bank account shows lenders that you have a responsible, ongoing relationship with a bank, therefore making you appear more stable and reliable.
Step One: Take your share of the credit for paying your bills on time
Increasingly, gas and electricity companies, broadband providers, and mobile phone operators are sharing customer data with credit reference agencies (CRAs). This means that if you don’t have much of a credit history — but you are contributing to these common household bills each month — you should add your name to the account.
Think about it. Handing over cash to a spouse, flatmate or family member to cover your portion of a shared bill means they’re taking the credit (literally) for paying on time.
Putting bills in your own name is a relatively quick and simple way to establish your bill-paying credentials and helps you start building credit fast.
Step Two: Make sure your bills are paid by Direct Debit
Once you’ve added your name to those bills mentioned above, the next thing you should do is make sure they’re being paid by Direct Debit.
Why? Because missed or late payments can harm your credit score. You’re now in the business of building credit, so you’ll want to avoid any early setbacks — especially avoidable ones.
Direct Debit payments mean you won’t forget to pay because the money will leave your account on-time (so long as there’s enough in your account to cover the bill).
Step Three: Approach your bank for a small overdraft facility
Now that you’re contributing to the bills (officially) and they’re being paid on-time, the next thing you’ll want to do is demonstrate your creditworthiness.
But don’t dive into a credit application just yet; an early rejection could harm your credit-building progress. Instead, speak with your bank about adding a small overdraft facility to your account.
Some current accounts already offer this as a feature, so this could be relatively straightforward. However, others will require an application process. It’s, therefore, a good idea to discuss your chances of approval with your bank before going ahead.
Now, this is the important part: If successful, you shouldn’t use this overdraft if you don’t have to. Its purpose is to add another piece of positive information to your credit report. Dipping into an overdraft can be a risky and expensive game due to the interest charged on the money you borrow. There are other, more affordable, products that can help you build your credit score.
Step Four: Start using a prepaid credit-builder card
When it comes to building your credit rating, slow and steady progress will always win the day.
So, whether you manage to add an overdraft or not, your first step towards actually managing debt should be a considered one.
Don’t apply for multiple credit cards in the hopes of being accepted for one, as too many credit applications too close together will reflect poorly on your credit score.
Instead, the best way to build credit is to start using a prepaid credit-builder card. These cards are a safe bet as they don’t require credit checks or proof of income when you apply.
They work like this:
During the application, select the credit-builder option.
- Next, load up the card with money and start using it as you would a normal credit or debit card (there’s usually a small monthly fee attached).
- The card provider will lend you a year’s worth of fees, and you pay this back each month over 12 months.
- Once you’ve made your first payment, the card company reports it to the CRAs, and your credit report is updated. If you continue to make these small monthly payments on time, you should see an improvement in your credit score after 3 months.
Step Five: Once your score is on the rise, apply for a real credit card
We’re into the home stretch. All this hard work building your credit score is about to pay off — you’re about to apply for a real credit card.
This is a crucial step because, if successful, it’s your opportunity to demonstrate that you can reliably and responsibly manage debt.
Why does this matter? Well, if you want to go for a mortgage or a car loan further down the line, you’ll need a track record of repayments. Lenders want to see that you can be trusted to pay them back on time and in full.
Just remember, before you apply, you need to check that you’re eligible. As we mentioned earlier, a rejected application will do more harm than good.
To do this, use an Eligibility Calculator that performs a ‘soft search’ on your credit file — this won’t impact your score, but it will give you an idea if your application will be successful.
Step Six: Make a habit of monitoring your credit score regularly
This final step isn’t the end of your credit building journey. In fact, it’s only just beginning.
Your credit report offers lenders a snapshot of your repayment history, so you can’t get complacent. You need to stay on top of your financial responsibilities and keep a close eye on your credit score.
The good news is, many of the leading UK credit report companies offer smartphone apps, so you can log-in and check whenever you want. And by monitoring regularly, you also have the chance to spot and fix any errors before they negatively impact your score.
And that’s it! How to build a good credit history in six steps. We hope this article has helped you grow and improve your credit score.
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