Credit Building > How to build your credit score from scratch

How to build your credit score from scratch

A credit score is a number that is supposed to represent your creditworthiness. Lenders check your credit score to figure out whether to approve your loan application and what interest rate they will offer you. Here are a few tips to build one from scratch.

Why do I need to have a good credit score?

Your credit score shows how risky lenders perceive you to be. A lower score means that you're seen as a risk, while a high score means that you're seen as a good borrower.

If you do not have a credit score, potential lenders can't determine whether you will reliably pay them back. This usually leads to your application being refused.

If you have a bad credit score, your applications might get accepted. Still, you will likely have to pay higher interest rates as the lender considers you to be a risky borrower.

However, if you have a good or excellent credit score, you have a high chance of getting your loan, credit card, or mortgage application approved. You can also expect to be asked to pay lower interest rates and be offered a higher credit limit.

How is my credit score calculated?

Your credit score is calculated by the credit reference agencies (Experian, Equifax, and TransUnion) based on data they get from banks, credit card companies, utility companies, local authorities, and other sources.

The basic idea behind the credit score is that your financial actions in the past can predict how you'll manage money in the future.

As a result, CRAs look at four main factors when calculating your credit score:

1. Your payment history. Do you usually pay bills on time? Do you make more than the minimum payment? Have you ever defaulted on your debt? Have you ever been taken to court?
2. Credit utilisation. Do you live on credit? Do you max out your credit cards? Or do you only use them for small purchases?
3. Length of credit history. How long have your accounts been open? How long have you been a responsible borrower?
4. Credit mix. Do you have multiple kinds of credit? Mortgage? Student loans? Credit cards? Can you handle different types of debt responsibly?

How do I actually establish my credit history?

First, take these basic steps:

• Register to vote. This is not only a legal requirement for British citizens but can also improve your credit score. That's because lenders check the electoral register to verify your identity. Just remember to update it if you move your address or change your name. And if you're an immigrant and don't have the right to vote in the UK, contact the CRAs and add a "notice of correction" to your credit report.
• Open a bank account. It's a quick way to show that you are a UK resident and start building a relationship with a bank. However, having no credit history might make it difficult for you to open your first account. The best solution, in our opinion, is to try an online bank like Starling or Monzo. Also, keep in mind that opening a new bank account can initially lower your credit score. Don't worry; this is only temporary.

Next, start showing lenders that you pay your bills on time:

• Have a utility bill in your name and pay it via direct debit. Utility companies can report some bill payments to the CRAs. Paying via direct debit can ensure that you never miss or make a late payment, which would damage your credit score. You should also check that your name is spelt correctly. You should even ensure that you always write your address in the same format – something as small as a typo in the street name can impact your credit report.
• Get a mobile phone contract. This is another easy and fast way to establish a credit history, as long as you pay your bill on time. Again, the secret is paying it by Direct Debit.
• Download Wollit and make your rent count towards your credit history, too. Wollit is a credit-building app that, among other features, enables you to report your regular rent payments to Experian. Another bill paid on time.
• Sign up for Experian Boost. Experian can also connect to your bank account and look at how regularly you pay your Council Tax, how often you save into ISAs, and even how you pay your Netflix and Amazon Prime bills. It then makes these payments also count towards your credit score.

Finally, start building and improving your actual credit history:

• Ask your bank for a small overdraft facility. Some current accounts come with a minor overdraft enabled by default, so check if yours has one, too. You don't have to actually use your overdraft, by the way. You probably shouldn't at all, as overdraft interest rates are usually quite expensive. The whole point is to have the overdraft option in your account so you can build your credit history – overdraft is technically a form of credit.
• Look into credit-building cards. This will likely be your first credit card if you have a limited credit history. This is a credit card created to help you build credit. Hence the name. You must be careful when using credit-building cards: credit-building cards have high-interest rates and fees (sometimes up to 60% APR) and usually no perks or rewards. Use it only for small purchases, pay off the balance in full each month, and try to never spend more than 30% of the credit card limit. Over time, as your score improves, the credit card provider should increase the credit limit and lower the interest rate.
• Consider a credit builder loan. Some credit builder loans ask you to deposit funds into an account and then give you a loan for the same amount. Once the loan is paid off, you get your deposit back. An alternative to this is CrediSpring, where you can get small credit-building loans with a 0% interest rate. However, you have to pay CreditSpring a membership fee that increases with the amount you borrow. Your actual APR (including fees and interest) can end up as high as 80%.
• Download a credit-building app like Wollit. Wollit and similar apps can be much safer tools for boosting your credit score. That's because they simply report your monthly subscription as a loan repayment instead of lending you cash at exorbitant APR.

A few general pieces of advice:

• Make only small, regular purchases on your credit card.
• Try to not use more than 30% of the credit card limit. This shows your credit card provider that you can manage credit responsibly.
• Always pay by direct debit wherever you can.
• Always use an eligibility checker before applying: An eligibility checker lets you determine your chances of being accepted without affecting your credit report and score.
• Don't make multiple credit cards or loan applications at a time.
• Always pay your statement balance on time and in full. You can pay just part of your balance, the 'minimum payment', without damaging your credit score. However, the remainder will attract interest. Credit builder cards have high interest rates. So, if you're not careful, your debt can quickly spiral out of control.
• Upgrade to a better credit card once your credit score improves. You'll get a lower interest rate, a higher credit limit, rewards, cashback, and even 0% on purchases for a specific period.

How long does it take to build my credit score?

Each step to establish credit can take only a few minutes to get started, but might appear on your credit score only weeks or months later. Banks and lenders usually only update your credit report every four to six weeks. Add to this a bit more time for credit reference agencies to update the credit score on their end.

Also, when you open a new account, your credit score might end up lower for a few months. That's because lenders often see new lines of credit as risky. Eventually, though, having new lines of credit that you use and pay back responsibly will improve your credit score.

This is valid for the credit score as a whole – Experian, Equifax, and TransUnion will look at how you progress over time and slowly increase your credit score if you show that you're consistently good at managing money. Especially borrowed money.

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