Your credit report is your life. Without it, your choices are limited. Everything from applying for a mortgage or a loan, getting a mobile phone contract, internet packages, car insurance and more are all affected by how good your credit rating is.
So, how do you avoid falling into arrears and ending up with a poor credit score?
It’s worth remembering that no credit rating is not the same as bad credit. The former means you have never opened any credit and is often the result of what stage you are in life. For instance, a young adult who has yet to open a credit card or apply for a loan is unlikely to have any credit rating.
If you have a poor credit score, it’s usually a consequence of making poor financial judgements. These could be from missing or late bill payments, defaulting on a loan, or being declared bankrupt.
Whether you have no credit score, or you’ve lost your credit rating through poor decisions, there are several ways you can build your credit report back up.
But with so many lenders bidding to catch your attention, and the risk attached to many borrowing schemes, it can be overwhelming to know where to start.
According to research, a quarter of low-income individuals who could benefit from borrowing don’t know how to improve their credit rating. So, what is the best advice to help you improve your credit report?
Get a credit card
Perhaps the most well-known way to build up your credit history is through opening a credit card. Convenient and easy to use, credit cards allow you to buy now and pay later and are a simple way to amass a good credit score in the long run.
The good news is that credit cards are obtainable if you’ve got no credit score. Many lenders offer student credit cards aimed at young people who have yet to accumulate credit history.
However, opting to pay with plastic can also have a negative impact on your credit rating if you’re not careful. Failing to make monthly payments in full and on time will go against you and subsequently lower your credit rating. That is why it’s vital that you consider whether you can keep up with the monthly payments before committing to a credit card.
The option to buy now and pay later can be tempting when you don’t really have the money for a purchase, so be mindful of making impulse buys. Also, make sure you check the credit card’s interest rate – or APR. Can you afford the APR if you accidentally miss a payment?
Start small with regular payments
While a credit card is a very effective way to build up your credit score, you need to use it regularly to reap the full benefits. After all, your payment history is what ultimately affects your credit rating.
If you have just opened a credit card for the first time, it’s a good idea that you plan to use it as much as you can afford so that there are regular payments on your bill. Your purchases don’t have to be excessive, just as long they’re paid on time and in full each month. Lenders tend to look at the length of time you’ve held an active account; therefore, the longer you’ve used your credit card sensibly, the more likely your score will be higher.
But what happens if you don’t have a credit card? It can be difficult to know how to build credit without a credit card but there are ways.
When trying to build up credit, especially if you have no credit rating, it’s worth checking out incentives or benefits offered by your own government or local authority. While researching the seemingly infinite number of lenders out there, it’s easy to overlook what you might be entitled to in your home state or country.
An example is the student loan system in the UK, where repayments on student loans are based on how much you earn, not on how much you borrowed. Even better, the loan is eventually written-off after a certain number of years and has no impact on your credit rating.
Make sure you check your state, government or other authority website to see what you might be eligible for before looking further afield to build your credit score.
All is not lost
There are some personal loans you can apply for that don’t require a credit check. This is good news if you’re having difficulty securing a loan due to having poor credit rating, or you have yet to build up your credit score. Payday loans and high-rate installment loans are just two examples of loans where the lenders often don’t need to know your credit history when you apply.
The importance of having a healthy credit score cannot be underestimated. While credit cards are probably the fastest and easiest tools to help you build up your report, it’s imperative that you weigh up all your options carefully to make sure you don’t negatively impact your credit rating.