Build Your Credit History
A how-to for students and young people
Credit scoring is about predicting future behaviour based on your past. So if you have no past, this can cause you to be rejected for a loan, mortgage, bank account, phone contract or energy tariff. We reveal how to get climbing the credit rating ladder to bag the best products.
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The 14 things you need to know to build your credit history
Debt is like fire – used right it’s a powerful tool, but used wrong it burns. The aim of this guide is not to encourage you to go out and borrow, but to build a decent credit history which helps you get other credit later on. A good history can also be the difference between cheap and expensive rates. So the earlier you start the better.
It's primarily for newbies to the world of credit; if you've already got going see our Credit Scoring guide to boost your chances of getting accepted.
You need a credit history to get credit
It's an odd fact of life, but you need to have a credit history before lenders will lend to you. The catch-22 is how you get started if no one is willing to lend to you because you haven't borrowed before.
And it's not just for big financial products such as loans, mortgages and bank accounts. These days, getting contract mobile phones, monthly car insurance and even whether you can pay by direct debit on your gas and electricity depends on your credit history.
When you apply for a product, a 'credit check' is done. In practice, this means lenders put all the data they have on you into a complicated algorithm. It's an attempt to predict your future behaviour based on what you've done in the past. While a poor history counts against you, so does having little credit history as it makes predictions less certain.
Imagine you lend someone money. On the surface, they may appear trustworthy. But if you don't have much information about them, you probably want to know more.
Since the credit crunch a decade ago, the importance of credit scoring to our financial lives has grown rapidly. Credit scoring now affects all of these major financial areas:
- Credit cards
- Bank accounts
- Water bills
- Energy bills
- Broadband & home phone
- Digital TV
- Mobile phones
- Car and home insurance (paid monthly)
So even if you think you won't use credit cards or loans, sooner or later your credit history will affect you. If you don't have a credit history by the time you come to apply for a mortgage, it's unlikely that a lender will grant you a mortgage, as it just doesn't have any evidence you can be trusted to pay a loan back.
It's best to start small - even if you don't need to borrow - so you've got that history of good repayment behind you. Read more on what products your credit score will affect.
Register to vote or it can be harder to get credit
The first step to building a credit history is to get onto the electoral roll.
If you're not registered to vote when you apply for credit, then you may be turned down. That's because as well as checking how likely you are to pay them back, lenders also have to check your identity when you apply (they want to know you're not a fraudster who'll run off with their cash).
Whether you're registered to vote at your current address is recorded on your credit file. It doesn't matter if this is your parents' address or your term-time address (if you're a student), although ensure you apply for credit at the one you're registered to vote at. Read more on why you need to be on the electoral roll (and what to do if you can't register).
Get a specialist student account - with 0% borrowing
At 18 or 19 years old, no one expects you to have built a credit history yet. But if you're a student, banks have special accounts which give you the ability to borrow - these are your gateway into the world of credit.
When you open a student account, you can apply for a 0% overdraft. These advertise overdraft limits of up to £3,000, though actual limits tend to be lower, especially in your first year.
Don't just open a student account with the bank you had an account with when you were a kid - chances are it's not the best. We've full information on the best student accounts, including 0% overdrafts up to £3,000 or a free four-year railcard, and what you need to think about when choosing, in Student Bank Accounts.
It's best to choose on the size of the overdraft, rather than any freebies the bank chucks at you. If you end up going over your overdraft limit because it's too low, you'll pay charges that'll make the cost of the freebie pale in to insignificance.
You need to manage your student account well...
Once you get it, you need to manage it properly. Immediately spending £1,000s and going over your overdraft limit is likely to show your bank and other lenders that you can't be trusted with money (as well as whacking you with hefty charges).
Instead, see your overdraft as there for a rainy day only. Add up your student loan, plus any grants, income from employment and money from your family. This is your income for the term and what you should be using when figuring out how much you have to spend each week.
While your overdraft rate is 0%, you should only treat it as there to help with cashflow issues, not as part of your regular budget.
Remember, an overdraft is a loan and someday you'll need to pay it back. The smaller it is while you're a student, the less you'll have to repay.
Read more on student budgeting and money management.
A credit card can help you build a credit history, but only if you use it responsibly
There'll come a time, whether at university or at another early point in your credit journey, when a credit card company will target you for one of its cards, complete with snazzy marketing.
Credit cards aren't a bad product in themselves, but in the wrong hands they can be.
The best cards normally require a decent credit history but there are cards that are designed for people with a poor credit history or a thin credit file.
If you've little track record, it's likely you'll need to start off with these. Yet because people using them are more risky for lenders, they make the cards quite expensive - interest rates of 34.9% are common.
But if you use these cards sensibly, you won't ever need to pay this interest rate. Ideally, you'll use it for planned, budgeted normal spending each month, pay it off in full on time, and reap the credit file benefits - doing this shows you can use credit responsibly and pay it all back. Check our guide for the best credit (re)build cards.
WARNING: If you don't have financial discipline, don't do this. Credit cards very easily allow you to spend more than you can pay back, even ones that have a low credit limit.
Before applying for a credit card, check whether you'll get it
It used to be that you just had to apply for any credit card you wanted. This would leave a search on your credit report, which other lenders could see. Too many searches makes you look desperate for credit, and can themselves be a cause of rejection.
We thought this was unfair, so we built our eligibility calculator. It allows you to see which cards you've the most chance of getting before you apply - and it doesn't leave a mark on your credit file that lenders can see (we do what's called a soft search, which means you can see the search, but lenders can't, so there's no impact on your credit file).
While if you've little credit history you'll probably only qualify for expensive cards (as mentioned above), you may as well check your eligibility for the best cards too, just in case you get a nice surprise. You can use our eligibility calculator to see which cards you've a chance of getting.
If you get a credit card, never miss a payment, or pay late
Even if you're struggling to make a payment one month, try not to default or miss payments - it can be a massive hit to your credit history. Missing payments once or twice could cause problems that cost you for years.
The easy solution is to pay everything by direct debit, then you'll never miss or be late. While we normally caution against only making minimum repayments on debts (as the faster you repay, the less the total interest - see the Danger: Minimum Repayments guide) one technique is to set up a direct debit to repay just the minimum, purely as a vehicle to ensure you're never late. Then manually pay more each month on top.
If you are in difficulties contact your lender - hopefully it will try to help. Changing your repayment schedule is preferable to you defaulting - and though it will hit your credit score, it's better than the alternatives, which can very quickly mean a good credit score goes bad.
Stability counts when you're building your credit history
You might live at four or five different addresses during your student years. That's going to hinder you when it comes to applying for credit.
Lenders look for stability, they're looking for you to live in one place, they want accounts that you've held for a long time.
If you can, use your parents' address for all your financial accounts. Keep application details the same between all accounts - the same address, the same phone number, the same bank details.
This consistency will help to demonstrate you're a responsible, stable person, not someone who moves around every year, who they would have a harder time tracing if you didn't pay them back.
Watch your credit score improve by checking your credit file every month (for costly errors too)
There are three credit reference agencies in the UK - Experian, Equifax and TransUnion (formerly Callcredit). Your bank account provider, and any credit card providers you have, will share data with at least one (and maybe all) of these agencies on how well you manage your account.
It used to be you'd have to pay these agencies £2 every time you wanted to see your credit report. But now you're able to see your monthly credit reports for free.
It's worth keeping an eye on your credit file for several reasons. Firstly, so you can check they've got the information right (and correct it if wrong - see repair credit file errors).
Secondly, to keep an eye on how you're doing with building a credit history. Each agency gives you a credit score. It will also say if this is excellent, good, average or poor - the idea is the more you do to improve your credit history, the higher your score will go.
Read our guide on how to check your Experian, Equifax and TransUnion credit reports for free.
The MSE Credit Club
Free Experian Credit Report – your credit accounts and how you've managed them.
Free Experian Credit Score – how lenders rate your past credit behaviour.
MSE Affordability Score – how lenders assess if you can afford a product.
Your Credit Hit Rate – how likely you actually are to be accepted when you apply.
Credit Card & Loan Eligibility Calcs – what your odds are of getting specific top deals.
What lenders really know about you
There are a lot of myths about what lenders really know about you when they decide whether to lend to you. The information they have is a lot more limited than you might think. They know:
- The information in your application form
- Any information from accounts you've had with them before
- Your credit history, obtained from one of the credit reference agencies (this includes electoral roll information, your history of credit repayment and more)
Don't let your flatmates' credit history wreck yours
If you're renting a flat or house, your flatmates credit history could affect yours.
If you're both (or all) named on broadband, gas or electric bills, then it's possible that a financial link is created on your credit records. This means that lenders can search linked persons' credit records when you apply for credit. And, if they don't like what they see on others' reports, it could result in a 'no' for you.
Read full information on why linked credit records happen, and how to delink.
Payday loans can KILL future applications
Some payday lenders have disingenuously suggested that taking their loans and repaying on time can boost your credit score, as it starts to build a history of better repayment. This is true to a very minor extent for those with abysmal credit histories – though using a credit rebuild card correctly is generally both more effective and far cheaper.
While not many payday lenders will touch students, as you don't have a regular income, there's some that do (Martin complained about one lender with a 1,089% rep APR targeting students).
Avoid them like the plague. Payday loans have hideous interest rates, and many mainstream lenders won't touch you with a barge pole if they see you've taken recent payday loans.
Read more on why you should avoid this hideous way to borrow in Payday Loans.
Don't panic if it all goes wrong
The tips in this guide are designed to help you build a good credit history as early as possible. But, nobody's perfect, and there's a chance that at some point, you'll get something wrong - you'll forget a payment, or simply not have enough money to make the payment.
The first thing to say is, you shouldn't panic - especially if it happens while you're young. The old adage 'time is a great healer', could have been inspired by your credit record. Your payment history's kept on there for six years, so by the time you're in your mid 20s, any student mishaps will have disappeared.
If that sounds like a long time, take heart. While anyone you apply to for credit will be able to see six years of history, they'll give the most weight to the most recent year or two. So, provided you quickly get back on your feet, any slip-ups shouldn't ruin your financial future.
These tips will help you build a credit history from scratch, but there's much more to know once you've got several energy, credit card and loan accounts. For a full rundown of what you need to know, see our Credit Scores guide.
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