You might think that having no record of borrowing or repaying money classifies you as the ultimate trustworthy citizen in the eyes of banks and other lenders. But ironically, if you have never found yourself in the position where you need to borrow money before (generally due to being financially independent), this can actually work against you when you do need to make credit applications, for, say, a mortgage or a mobile phone contract.
So, how exactly do credit scores work and how can you get a good credit score when you are starting with nothing? We share our tips on how to build credit history in this guide.
Assuming you are truly starting from scratch, your first step is to open a bank account. This is a simple way to show lenders that you have an active account where money regularly comes in and out.
You will need to keep your account details (including your address and contact information) correct and up to date and do your best to avoid overdrafts. Always make your recurring payments on time, as missed or late payments can show up on your bank statements and leave lenders questioning your ability to manage money responsibly.
If you are a UK resident, you will also want to make sure you are listed on the electoral register at your current address.
You might be wondering how this has anything to do with your financial trustworthiness, and it doesn’t really. That said, credit reference agencies will use this to confirm your identity and it can improve your credit score, especially if you have lived at the same address for a year or more. Something that only takes a few minutes of your time can make a noticeable difference to your credit rating.
If you never wanted or needed to borrow money before, you are probably a bit scared at the idea of doing so. In that case, you will probably be less daunted and feel more in control if you start small.
For instance, you could get a beginner-friendly credit card with a low credit limit, so you can build a credit history without the temptation of spending beyond your means. You could just use your card for everyday spending and pay off the balance in full each month, which is enough to show lenders that you can borrow and repay responsibly.
Just make sure to spend within your means, as you don't want to negatively impact your score. You can always increase your credit limit if necessary in the future.
Companies are more likely to offer you credit or lend money if you can show proof of your ability to make regular monthly payments. So, if you have not already set up direct debits to pay your recurring bills, add this to your list to do next. This will make life easier for you, too, as you will be able to stay organised with your bills and avoid late or missed payments.
Keep in mind that any missed payment will end up on your credit report for up to six years and can be the reason why you are refused credit down the line.
Building your credit history requires the same sort of patience as saving money. Getting a good score will not happen overnight, but if you follow the tips in this guide, you will get there within a few months to a year.
How do you know if your credit score is improving? Credit reference agencies like Experian, Equifax or TransUnion all let you look at your credit report for free. The more consistent you can be with paying bills on time and keeping your credit balances low, the better your credit profile will look and the lower the interest rates you will have access to, giving you more financial freedom in the future.
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For more helpful information about how to manage your money, different financial products or what we do at Polar Credit, take a look at our Info Hub.