How to build, repair or maintain your credit history

In a perfect world credit wouldn't exist, because people would earn the money they require before making purchases like a car or a house. Credit cards would only be around for us to take advantage of the benefits they can provide such as cash back deals and other reward bonuses, and no-one would have to worry about paying high interest charges. There would be no such thing as a credit history.

Unfortunately, this is not the case, and many of us rely on a number of different types of credit to make these large purchases, from credit cards to finance deals.

In order to be considered for deals offering the best interest rates, lenders first take a look at your track-record and make a decision as to whether they see you as a risk based on a number of factors.

It doesn’t stop there, as it may surprise you to learn that employers and landlords can also check your credit history before offering jobs and rented properties. In today’s society there are few ways of escaping the need for credit, so your credit score can be very important.

How your score is generated

Every time you apply for credit your records are stored and used to build towards a credit profile. Whether you've taken out a mortgage, personal loan, credit card, overdraft, contract mobile phone, utility bills or even monthly car insurance, your details will be checked and added to in order to predict how likely you are to cause risk.

Missing bill payments or making late payments can have a negative affect on your score, which may lead to future credit applications being rejected.

Lenders use several pieces of information when deciding whether you pass their acceptance criteria, including data held by three credit reference agencies - Experian, Equifax and Callcredit.

If you have no previous experience with credit, it is unlikely that you have a credit history. This can work against you want to borrow, as lenders prefer to have some kind of reassurance that you can be trusted to pay back the money owed, which  usually gained from looking at your previous track record.

Building a good score

There are several ways in which you can both improve or repair your credit score, so if you have poor, adverse or no credit history at all then help is at hand. While there is no an exact science to improving your score, there are several things you can do to sway lenders’ attitudes towards you.

If you haven't done so already, open a bank account and/or savings account. This may not be so simple if you don't have a respectable credit score, so you may have to look at a guaranteed bank account, although these bank accounts come with limited features, for example you may not be given access to a debit card.

Apply for and make use of a credit card. While this doesn't always appear to be the best advice, it is very important in your quest to build up a good score. The golden rule which will earn you a good score is to ALWAYS pay at least the minimum repayment every month, or even the full balance to avoid paying interest.

If you have never had a credit card before it is unlikely that you will qualify for the best credit card deals, so you may wish to consider applying for bad credit cards that come with higher than average interest rates, such as the Vanquis card. Don’t let these high rates put you off, as if you ensure your balance is paid of fully each month, you will never have the interest applied. Also, if you make too many applications for credit within a small space of time your score can be damaged, so keep it simple.

Begin using your new credit card to pay for some of the things you would normally pay for by cash or debit card, while making sure you keep the money aside to cover the monthly bill. This will help to show lenders that you can effectively manage your credit while keeping on-top of your payments. Provided you pay off your credit card balance every month without fail, you will never pay a penny for using the card, and you will be building up a valuable credit history.

If you find you are unable to pay off your balance in full on some occasions, just make sure you pay off at least the minimum repayment amount. Even if you’re struggling, this should be your priority as missing payments could lead to a default or County Court Judgement (CCJ) that haunt you for years. The same rule applies to your mortgage payments.

If you do find you are have difficulties with your repayment plan, the best thing you can do is speak to your lender, as they may be able to help you to change your repayment schedule.

The easiest and most effective way of making sure your credit cards are paid on time is to set up a monthly Direct Debit, allowing your payments to happen automatically.

Sign up to the electoral roll.

If you’re not currently on the electoral roll, it is unlikely that you will be successful in your credit applications, so this is a must. Don't wait for your annual reminder, sign up online on the 'About my vote' website.

If you aren't eligible to vote (foreign nationals, etc), you can send each of the credit reference agencies proof of your residency and request that a note is added to verify this to increase your chances of obtaining credit.

monitor your credit score

If you have been refused credit in the past, or you're simply curious about your credit status, you can request a report from any of the credit agencies. This does come with a fee, but this is generally less than ten pounds and can provide you with useful data. You can also contest any entries that you feel are not correct, so it's well worth spending some time going through the information as your score could have been tainted unnecessarily. 

It's good practice to check your credit reports periodically. If possible, get a report from all three agencies, as there’s no harm in doing so and this allows you to keep a close eye on every entry in your report so you can spot any error that might be causing you problems. Repeat the check-up every 12 to 18 months, and try to avoid getting your report after making any important applications, as these can effect your score.

If you would rather avoid having to pay for a credit report, you can get access to a simplified version for free by registering for a free monthly trial. This will require you to set up a Direct Debit or regular credit card payment using your payment details, but you won't have to pay anything as long as you close your account before the free period expires.

If you do find something in the report that you disagree with, you can request a change by writing to the agency. Although these amendments can be refused, you are entitled to add your own comments as a ‘notice of correction’, which may help you with future credit applications.

If something doesn’t look right, write a concise, explanatory and factual letter to detail the error, and avoid writing something too wordy.

Space out credit applications.

One thing that you must remember is that each time you make an application to any form of credit, a credit search will be carried out, and making too many applications in a short space of time can have a bad effect on your score. You should therefore space out your credit applications, and even for things like car insurance, mobile phone contracts.

Moving house is also likely to disrupt your score, so if you're planning to make any important applications ensure they have completed by the time you come to relocate. You will also have a better score when you’re earning a salary, so if you planning to take time off due to maternity leave or suspected redundancy, make your applications beforehand.

Joint finances can effect your score

If your husband/wife has a bad credit score it shouldn’t impact your finances, providing their data doesn’t appear on your file.

By becoming ‘financially linked’ to someone through any product who has a bad score, such as a mortgage or a joint bank account, can cause negative effects to your score. Even simply opening a joint bills account when sharing a flat can mean you’re co-scored.

The general rule of thumb is if one partner has a bad credit history, keep your finances separate wherever possible.