How to Get Credit for the First Time
Getting credit can be instrumental to many people. If you don't have the cash to lay down on anything from a new car to a house to a mobile phone, you will need credit in order to pay in instalments. That could mean paying a mortgage, a car payment, or a mobile phone bill. But if you're young or you've recently moved to the UK, you might find that you have problems getting credit. That's why we're taking a look at how to get credit for the first time.
Credit: The Basics
Credit basically means borrowing money. You're probably not intending to directly borrow money (although perhaps you need a loan). However, you might want to buy something that you don't have all the cash for, in which case you'll pay for the item in instalments, and this is essentially borrowing money.
From a house to a car to a mobile contract, a company can choose to give you credit so that you don't need to find the full purchase price for what you want immediately. There's a catch though: obviously, the company in question will want to know that you're going to pay the money back.
How does this work? Well, a company will look at your credit score. If your credit score is good, then the company will likely lend you money. If it's bad, they might not lend you anything.
What's a Credit Score
Your credit score is a rating based on your financial history. If you've borrowed money in the past and repaid it, if you've paid bills on time and generally been sensible when it comes to finances, your credit score will be good. If you've missed payments, made late payments, or had legal proceedings taken out against for financial reasons, your credit score will be bad.
There are three major companies in the UK that track credit scores, and companies may contact any one of them to find out more about you and your credit history. These companies are:
The Problem for First Time Borrowers
There's a problem here, however. If you're very young, or if you've recently moved to the UK, then you won't have borrowed money from UK institutions or had a chance to show that you can pay bills on time. Essentially, you have no credit history.
This means that your credit score will be zero. So when a company you want to borrow money from looks you up, they won't be able to see if you're a good risk or not. This means that companies may not lend to you at all, or may want to charge you hefty interest rates to borrow.
If you're looking at borrowing or signing that car deal or mobile phone contract, then you're going to want to build a credit history. A good credit history will show you as a good risk, meaning you're more likely to be able to borrow and more likely to get low-interest rates.
How to Build a Credit History
You will have to be a little patient, since building a credit history will take time. Ideally, you should take three to six months to start building a credit history, though some companies may need longer. A year of credit building should work for pretty much anything though. Building your credit history is pretty simple.
Open a UK Bank Account
Your first step should be to open an account with a UK bank. Put some money into your account, and make sure that you don't get overdrawn (take out more money than you have). Your account will come with a debit card, so use this responsibly!
Get a Credit Card
Once you have a bank account you can apply for a credit card. Some banks will allow you to get a card with your account, but in many cases, you won't be allowed to if you don't have a credit history or if you don't have a certain amount of money in your account.
If you can't get a credit card through your bank, you can apply for one elsewhere. Directly through a credit card company like Visa or Mastercard, or through a shop, or just look around online. You'll probably find that as a new customer with no credit history you will only be offered high-interest rates, but this doesn't matter for now, just get the card.
Now, here's the key part. You must use your credit card for purchases (a couple a month is fine), but you must ALWAYS pay off the balance on your card at the end of the month. Do NOT let the balance roll over to the next month, pay in full and on time. This is why the high-interest rate on your card doesn't matter since you won't have to pay any interest if you're paying off the balance on time.
It's important to realise that the only way you will get a good credit rating is by doing this. If you feel that you can't handle this and will be tempted to spend more on your card than you can afford to pay off monthly then don't get one! Missing payments or late payments will give you a bad credit rating.
Set up Direct Debit
You should also set up a few direct debit payments from your bank account. Household bills like electricity and gas are usually good direct debit payments. This will show that you're using your account, and since a direct debit payment can't be late or missed (as long as there's money in your account) will help give you a good credit rating.
Get a 12 Month SIM Ony Contract
Signing up for a 12-month SIM-only plan can help you improve your credit score. Even though there's no credit facility involved, a SIM only contact is a way of borrowing. The network gives you a bundle of texts, calls and data each month; and you agree to pay for it in full when you receive your monthly bill. When you pay on time, you will be adding positive information to your credit report. Of course, if you miss a payment then this can have a negative impact on your credit score. This only applies to SIM deals with 12-month tie-ins, and not 30-day rolling SIM deals that do not require a credit check.
Things That Can Prevent You Getting Credit
If you follow the above steps and wait for a few months you should find that you are able to get credit, since you'll have a credit history. There are a few things, however, that may still stop you getting credit:
- Not Being on the Electoral Roll: If you are eligible you should sign up to be on the electoral roll for the UK. The process is free and takes only a few minutes, and this proves your identity and address, making you look more responsible meaning companies are more likely to give you credit
- Having Missed or Late Payments on Your History: If you do make a mistake and miss payments for bills or make them late, this can make your credit rating so bad that no company will lend to you. If this is the case, you should wait a few more months and ensure that you're making all payments on time before trying to get credit again.
- Having Financial Links to People with Poor Credit: If you are financially linked to someone that has bad credit (your partner, ex-partner, or parents perhaps), you may be denied credit because a company can check not only your credit rating but also the rating of someone you're linked to. This isn't a question of relationships, there will need to be an actual financial link. Perhaps someone has used your name to apply for a credit card or to put on the mortgage deeds of a house. If you are having trouble getting credit financial linking is something you should look into. This information should be shown on your credit report.
How Do I Know My Credit Rating?
If you've followed all of the above steps to start building a credit history you may be wondering how you can know if all your hard work has paid off. This is simple. Just go to the three major credit rating agencies and request a free copy of your credit rating. A look at the report should give you a clear idea of how you're doing, as well as letting you know if you're financially linked to someone else. You can get a free copy of your credit report here:
Credit Changes Over Time
Your credit rating will change over time to reflect how responsible you are with your finances, so it's worth keeping an eye on that credit report at least once a year. But pay your bills on time and you should find that your credit rating gets better over time, meaning you're more likely to get credit, and you're more likely to get low-interest rates.
Building a credit history isn't difficult, though it does take a little time. But if you want to borrow money, either now or in the future, you don't have any choice. So start building your history now, the sooner the better!