Building a credit score from scratch can feel daunting, but it’s an essential step towards financial independence. A good credit score opens doors to better interest rates, loans, and even rental agreements. Here’s a straightforward guide to help you start building your credit score from the ground up.
A secured credit card is one of the easiest ways to start building credit. Unlike a regular credit card, it requires a cash deposit, which acts as collateral and sets your credit limit. Use this card responsibly by making small purchases and paying off the balance in full each month. This will help you establish a positive payment history, which is crucial for your credit score.
When you register to vote, your name and address are added to the electoral register, which helps lenders verify your identity and address during credit applications. This verification process reassures lenders of your stability and reliability, making it easier for them to assess your creditworthiness.
If you're not on the electoral roll, lenders may struggle to confirm your details, which could result in declined applications or less favourable terms. Being on the electoral roll is a simple but effective way to improve your credit profile!
Credit-builder loans are specifically designed to help people build credit. When you take out a credit-builder loan, the money you borrow is held in a bank account until you’ve paid off the loan. Your payments are reported to the credit bureaus, helping you build a payment history. Once the loan is paid off, you receive the money, plus the benefit of an improved credit score.
Payment history is the most significant factor in your credit score, making up about 35% of your score. Even if you don’t have a credit card or loan, paying all your bills on time is vital. This includes utilities, rent, and any other recurring payments. Late payments can be reported to credit bureaus, negatively impacting your score.
Credit utilisation refers to the percentage of your available credit that you’re using. It’s recommended to keep your credit utilisation below 30%. For example, if you have a credit limit of £1,000, try to keep your balance under £300. This demonstrates that you’re managing your credit responsibly and can boost your score.
While you don’t want to take on too much debt, having a mix of credit types – such as credit cards, personal loans, and retail accounts – can positively impact your score. Lenders like to see that you can handle different types of credit responsibly. However, be cautious and only take on what you can manage.
Regularly checking your credit report helps you stay on top of your progress and spot any errors that could harm your score. You’re entitled to a free credit report from each of the major credit bureaus – Experian, Equifax, and TransUnion – once a year. Look for any inaccuracies and dispute them if necessary.
Building your credit score from scratch takes time and discipline, but it’s entirely achievable with the right approach. Start with simple steps like getting a secured credit card or becoming an authorised user, and ensure you always pay your bills on time. By keeping your credit utilisation low and monitoring your credit report, you’ll be well on your way to establishing a strong credit score that will serve you well in the future.
