10 steps to a perfect credit record

by Rachel Wait on 09 October 2010  |  9 comments
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Never had credit before or got a tarnished credit rating? Find out how to build up the perfect credit record...

For some people, the idea of taking out credit is a big no-no. Some people refuse to ever own a credit card, believing that this is only likely to encourage them to get into debt.

But while this might seem logical, avoiding credit all together can actually end up working against you.

That’s because if you later need to apply for credit – perhaps you want to take out a mortgage, for example – you may find it a challenge to get accepted by a lender because you have no credit history.

Confusing credit reports

Getting to grips with your credit report can be difficult and knowing exactly what can have an impact on your credit report isn’t always clear-cut.

Every time you apply for credit, this will be recorded on your credit report. Credit can include credit cards, mortgages, overdrafts, loans, storecards, hire purchase agreements, mail order accounts, mobile phone contracts, and some domestic energy contracts. In other words, anything where you've taken money, goods or services into your possession, in advance of payment, can be classed as 'credit'.

So, if you’ve never applied for any of these forms of credit, your credit history will be blank – and that's bad, because it means there’s no evidence that you can 'handle credit responsibly'. Unfortunately, this means lenders won't feel as comfortable lending to you as to someone with a good credit history, as with you, they cannot be sure that you pay back what you borrow.

So what can you do if your credit history is coming up blank or if it’s a little tarnished? Follow these top tips to find out how to get a perfect credit rating from scratch.

1. Get on the electoral register

First of all, if you’re not already on the electoral roll, get on it. The electoral roll is used by lenders to check that you live where you say you live. It also bodes well if you’ve stayed at the same address for a number of years as lenders prefer stability. Registering on the electoral roll is free and enables you to vote and take part in jury service.

2. Employment history

Just as living at the same address for several years can help your credit record, so can staying in the same job. If lenders see you've had a stable job for several years, they will know you have a stable income and as a result, they may be more willing to lend to you.

3. Get a bank account

If you don't already have one, apply for a current account. If you've never had credit before, this can help you to build up a relationship with your bank, and once you've done that, your bank is more likely to offer you an account with an overdraft facility which, providing you keep within your limits, will help you collect some positive credit history.

Your bank may then later be more willing to offer you a credit card or a loan.

4. Check your credit report

Before you apply for any credit, give your credit report the once-over. If you're worried about how much this might cost you, don't be. You can sign up for a free credit report from Experian. Just remember to cancel your membership before the 30-day trial period is up to avoid being charged in the future.

Alternatively, you should be able to pick up a copy of your credit report for £2.

Check your credit record thoroughly to see if everything is up to date and accurate.

5. Correct mistakes

If there are any mistakes on your credit report, get them corrected. This could be an incorrect address or an account which is listed as being open when it’s closed.

You can do this by informing your lender and asking them to correct it. Alternatively, you can contact a credit reference agency and ask them to contact the lender on your behalf.

If you’ve already had credit in the past and perhaps missed a few payments due to illness or redundancy, you can also add a 200-word statement to the credit report to explain this. This is called a ‘Notice of Correction' and it may help the lender to look more favourably upon you. You will need to contact a credit reference agency with the statement and ask them to put it in your report.

6. Close unwanted accounts

If you already have some credit, but you're struggling to get more, make sure you close down any unwanted accounts. For example, if you have a mail order account with a catalogue that you no longer use, get rid of it. All of this is classed as credit and will affect your credit rating.

If you have a lot of credit available to you, this may put lenders off giving you more.

7. Detach yourself

The people you live with won’t have any impact on your credit rating, UNLESS you’re financially linked to them. So if you share a mortgage or a bank account with someone, your credit history will be connected.

Bear in mind, however, that this is still the case even if you DON’T live with them. So if you have any ex-partners lurking about and you no longer want to be financially connected, make sure you detach yourself from any joint accounts or borrowings and your credit report reflects this. That way, future applications won’t be affected by whatever the other person is doing now.

8. Limit your applications

If you’ve been turned down for credit, don’t think that you’ll solve the problem by making lots of other applications – you won’t. Every time you apply for credit it leaves a ‘footprint’ on your credit report and if lenders see a lot of these over a short period of time, they are less likely to want to lend to you as they may believe you’re overstretching yourself financially.

It’s far better to simply ask for a quotation to find out what kind of offer you might get, before ploughing ahead with an application.

9. Get a credit-builder style credit card

If you’re still having trouble getting accepted for credit, you could consider applying for a credit builder style credit card. These types of cards allow you to rebuild your credit rating. 

The downside is that they come with high rates of interest, so if you’re going to use one, make sure you repay everything you spend in full each month to avoid paying interest.

Examples include the Barclaycard Initial Visa (29.9%), the Aqua Credit MasterCard (35.9%) and the Vanquis Bank Visa (39.9%).

Alternatively, try applying for a store card. Generally at lovemoney.com, we’re very much against using store cards, purely because they entice you in with tempting offers and then hit you with an extortionate interest rate. However, if you can manage to pay off your bill in full each month, store cards are generally easier to get hold of than standard credit cards and can be a handy way of building up your credit rating.

10. Pay up on time

If you do get hold of credit, make sure you always pay up on time and keep within your credit limits. There’s no point being offered a credit card, only to continually forget to pay off your bill or go well over your limit. If you do this, your credit rating will go down, not up, because you’ll be regarded as unreliable.

Finally, don’t forget to check your credit report on a regular basis to see where you stand and whether it's improving. Once it’s looking healthier, you’ll be able to apply for more credit.

Sign up for a free credit report from Experian.

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