De-mystifying Credit Building - A handy guide

What is Credit Building?

Credit Building and Credit Repair are phrases that are often mentioned alongside each other and together with building or improving your Credit Score. It’s clear that many people see them as meaning the same thing although they are actually different. So the first thing we should do is help you understand the difference.

Credit Building

Credit Building requires you to actively do things that will have a positive impact on creating and building a Credit Profile for you. A Credit Profile is essentially all the information that Credit Reference Agencies (often referred to as Credit Bureau in the UK) hold about you. This includes things like your Bank Account and credit accounts and most importantly for lenders, your payment history on any credit accounts you have. Credit Reference Agencies will usually have very little information about someone who needs to build their credit either because:

• they are quite young, perhaps just finished school or University,

• they are new to the UK and haven’t had time to create a Credit Profile here,

• or because they like to pay cash for everything and don’t have a history of taking credit or paying for things by direct debit.

The four main Credit Reference Agencies in the UK are: Equifax, Experian, TransUnion and Crediva.

Credit Repair

Credit Repair also requires you to actively do things that will have a positive impact on your Credit Profile. The term generally relates to someone who already has a credit profile that is causing them to have a low Credit Score and they want to repair it. Their low Credit Score is likely to be a result of some past financial catastrophe or a bad payment history for one or some of their credit accounts. People in these situations tend to only have access to high cost credit options, want to be able to access less expensive forms of credit and therefore, want to ‘repair their Credit’. Repairing your Credit is typically much more difficult than building you Credit. There are some things that negatively impact your Credit Profile and Credit Score for a long time for example, bankruptcy which will stay on a person’s Credit Profile for at least 6 years.

Building or improving your Credit Score

Building or improving your Credit Score is the result of activity undertaken to build or improve your Credit. Your Credit Score is based on lots of different things such as; being on the electoral register, your payment history on current and historic credit agreements, even the payment behaviour of people linked to you through joint accounts. If you want to find out what’s bad and what’s good for your Credit Score we cover this further on in this article.

How to build your Credit

Register to vote - Making sure you’re registered to vote allows lenders to verify your identity. It helps them prevent fraud and makes you look like a better risk. It shows you have a permanent address, indicates you’re stable and that you are more likely to pay your debts. You can only be on the electoral roll if you’re eligible to vote in the UK. If you’re not eligible to vote in the UK, don’t worry, you can send proof of your identity and your address directly to the Credit Reference Agencies. You can ask them to add a note to your credit report confirming that they’ve verified your identity

Get yourself a Bank Account in the UK - A bank account helps you build your Credit. It does this because it helps credit companies verify that you’re resident in the UK. It also makes managing your money easier and can help you ensure your payments are made on time, which has a positive influence on your Credit Score. If you have had the same bank account for a long time, it can make you seem more stable to a prospective lender. You usually need proof of your identity and your address to open a bank account. If you don’t have acceptable proof of your address you could consider opening a digital bank account with one of the new banks aimed at people who don’t have proof of address, Starling Bank is one example but you can find others with a simple online search.

Work on building a good credit profile - It can be difficult to get credit if you don’t have a credit history or you have a ‘thin’ credit profile. A ‘thin’ credit profile, in simple terms, means the Credit Reference Agencies don’t hold enough information about you to create a Credit Score for you. It can feel like a Catch 22 situation i.e. you can’t get credit because you don’t have a credit history but you can’t create a credit history if you can’t get a loan. Don’t despair, there are things you can do.

Ask your bank for a small overdraft facility - you don’t have to use it, and in most cases it’s better not to use it as overdrafts can be expensive because of the charges you pay. Just having the overdraft helps you build your credit history by adding more information to your Credit Profile.

Get household bills put in your name - increasingly, companies such as utilities and broadband providers are sharing their payment data with Credit Reference Agencies so, if you don’t have a credit history getting these bills in your name adds more information to your credit profile and helps you to build your credit. It’s important to check that your personal details on the bills are correct. Little things like incorrect spellings can lead to errors or incorrect information in your Credit Profile and your credit report.

Use direct debit to pay for regular bills - when trying to build your credit it’s very important that you always pay them on time. Paying in full is just as important. Paying by direct debit ensures that you won’t forget to pay them. With direct debit payment is automated so you don’t have to remember to pay them. Remember, it is important to make sure you have enough money in your account when the debit is due to come out. Not paying your bills on time is a sure fire way of damaging your credit building efforts.

Think about getting a credit builder product that doesn’t require a credit check - a new rash of credit builder products are now on the market. These products were developed to help people build their credit by enabling them to build a credit history, safely. By safely, we mean without the temptation to get deeply in debt and ending up in 'debt spiral'. For example, there is a product called Loqbox that allows you to deposit savings on a monthly basis. These deposits count as loan repayments and are reported to the Credit Reference Agencies, helping to build your credit by adding information to your credit profile. You’ll need to save a minimum of £20 per month with Loqbox and the great thing is, not only do you get your money back but you can build your credit without getting in to debt.

Think about getting a Creditspring membership - if you’ve managed your finances well and have been paying your bills on time for a while, you might want to consider getting a Creditspring membership. A Creditspring membership is a new safer way of borrowing that helps you build your credit. With our Plus product, you get access to two loans of up to £500 per year, to use as and when you need to. Ideal for times when you need to stretch your budget or you have unexpected expenses. There’s no interest on the loans, instead you pay a small, fixed monthly membership fee. (Rep APR 66.2%). If you’re unsure of why an APR is quoted when no interest is charged on the lines, tap here for an explanation. Credit provided by Inclusive Finance t/a Creditspring. Loans are subject to status, for over 18s only and T&Cs apply. A Creditspring membership is more than a loan. You also get a personalised Financial Stability Score that’s updated monthly. This feature is unique to Creditspring, and designed to help you understand how well you might weather a financial storm or shock. You also get practical coaching on how to improve your financial stability and access to other products and services specially selected to help you save money and help you improve your financial stability and financial wellbeing. If you decide to join, your credit score may go down temporarily (this happens when you take most loans). However, it will recover if you make your membership payments and repayments of the loans on time and in full. You can check if you’re eligible now by clicking here. Checking your eligibility will not have a negative impact on your Credit Score. If you are not eligible now, you can always try again in three months time.

Consider getting a credit builder credit card - these cards are designed for people who don’t have a credit history. They usually have quite a high interest rate, typically over 30%. They are a good way to build your credit however they need to be managed carefully as it is easy to fall in to the trap of just paying the minimum payment. Just paying the minimum payment means you could be racking up a huge amount in interest charges. If you manage it carefully, your provider should offer to increase your credit limit and eventually reduce your interest rate. Most providers also allow you to check your eligibility without negatively impacting your credit score.

Manage your debt to income ratio - if that sounds scary, don’t worry, it just means you should try to keep your debts to no more than 36% of your gross income, your debt to income ratio is a figure that a lot of lenders will look at to assess whether you can afford to pay them back and whether you’re a good risk. They look at a lot of other information but this figure and your credit utilisation in relation to your credit card(s) are important. The ideal is to keep you credit utilisation below 50%. Debt to Income Ratio is worked out as follows: Monthly Debt Repayments including rent or Mortgage Payments/Gross Monthly Income Credit Utilisation is simply, your outstanding credit card balance(s) divided by your total credit limit(s). You need to remember that credit building or building your credit takes time but is definitely worthwhile as it helps you to improve your credit score. Improving your credit score helps you to get less expensive credit, a mortgage, mobile phone contracts, helps you when looking to rent your home and just makes life easier all round.

Want to build or improve your Credit Score?

Here are some of the things that Experian say are bad and good for your Credit Score:

What’s bad for your Credit Score

• Setting up lots of new accounts - when you open a new bank account it will lower your credit score but this is only a temporary affect. However, opening accounts too often means your score won’t have time to recover and will take longer to improve.

• Maxing out your credit card or overdraft - doing this may cause lenders to think you’re in financial difficulty.

• Applying for Credit too often - particularly if the credit companies or lenders don’t offer what is known as a ‘soft search’, a ‘soft search’ doesn’t register on your Credit Profile.

• Missing payments on a loan or credit agreement - missing regular payments to lenders can get recorded as a default in your Credit Profile and this can lower your Credit Score for up to six years.

• Borrowing more than you can afford to pay back - if you are unable to repay your debts, you may need to get a Debt Relief Order or Individual Voluntary Agreement. Your debtors can also reclaim money you owe by getting a County Court Judgement issued against you, or they can even apply to make you bankrupt. None of these things are good for your Credit Score.

What’s good for your Credit Score

• Keeping the number of bank accounts you open to a minimum - or leaving a gap before you open a new account if you have only just opened one, so you leave time for your Score to recover.

• Limiting the number of credit applications you make - applying for credit frequently, over a short time period, can make lenders think you are ‘credit hungry’ i.e. over reliant on credit and therefore a higher risk. Experian say a good rule of thumb is to make no more than one application every three months.

• Make your credit payments and make them on time - not making your payments on time or not making them at all will harm your Credit Score. If you’re a late payer or you default on a credit agreement by not making your payments, you’ll look like a high risk to future lenders. This will increase the cost associated with the credit options open to you in the future or you may find it very difficult to get credit at all.

• Only borrow what you can afford - the best guide to working out what the credit companies think you can afford is to calculate your ‘Debt to Income Ratio’ (DTI) and as we said earlier most of the experts quote 36% as a the ratio to aim for. During our research we found some nifty calculators out there that can help you, just do a quick online search and you’ll find them.

• Protecting yourself from Identity Theft and Fraud - it’s worth checking your credit report every month so you can spot signs of fraudulent activity as this can help you to protect your Credit Score. If you see a sudden increase in the amount you owe, applications you didn’t make or a new account you didn’t open, you could be a victim of fraud. If this is the case lenders should fix the damage to your score quickly but it is important to take action by contacting the companies appearing on your credit report Credit Report. There are lots of ways to get your Credit Report for free, one we think is particularly good is ClearScore, as they also provide lots of coaching for improving your Credit Score.

(This blog was last updated on 15th of October, 2022 with the latest product pricing)