The 6 Critical Factors in Gaining a Strong Credit History!

Adam Brand Adam Brand | Operations Director

Recently, I applied for a mobile phone contract and I was quite embarrassed when I was offered a contract on a conditional basis. I really thought I had a “perfect” credit record because I have hardly used credit and have always paid off the bill on whatever credit I had.

I decided to apply to get a copy of my credit file to each of the three credit reference agencies and was completely surprised to find that I only had one entry from a store card I briefly held—now paid off and closed—years ago. My reports had no other credit history on file.

If you’ve experienced something similar, you’re not alone. Many people think their credit history is strong even if they’ve never had credit at all. Unfortunately, this is not how credit works, as you’ve most likely learned.

When a mobile phone company tells you that you will have to pay £100 as an upfront deposit, you start wondering about your credit rating and find out later on that you and your wife have a lack of credit history reported at all three credit reference agencies. Or, possibly you’re young and quite new to credit, and you were also offered a contract with conditions, despite the fact that you’ve never had to borrow or have used a credit card in your life—another common scenario especially among students.

If you currently own a small department store card at let’s say Barclay’s and have held this account in good standing for many years, it’s highly probable that it was never reported to your credit files. If you’re a student who has just left the nest, you most likely have no borrowing experience whatsoever, so you won’t have anything at all to report on your credit file, leaving lenders in the dark about your ability to pay off and manage debt.

When Banks Report

Banks started relaying and reporting information about bank accounts with overdrafts, mortgages, and credit after the year 2000. If you hold a card that was never reported to your file, you can request that it get added to your credit file, but this cannot be done retrospectively. The bank can only start relaying the information starting from the present time, so it may take some time to build up a credit history should you decide to go this route.

What does having a credit file do?

Whenever you apply for credit cards, mortgages, or for a mobile phone contract, the provider typically gleans your reports from all three credit reference agencies—Equifax, Experian, and Callcredit—to see if they want to lend or do business with you. All banks and mobile phone companies report your history with each of these agencies, which is why all three of these agency reports are checked.

Credit reporting agencies may also be used to open savings accounts to make sure a bank is in compliance with money laundering regulations. They often use this report to for verifying identities and addresses. If they do not find enough information about you on any of these files, they will most likely ask for it, or if the information does not concur, then they will also ask for proof of your identity.

If you have nothing showing on your file, you may feel like a bit of an outcast because you may be deserving of obtaining the credit you need, but having nothing on your credit history is almost as bad as having unpaid debts reported on your credit history. Either situation will most likely have your application turned down. Many people have expressed their frustration and anxiety about how much power credit agencies seem to have.

How do I know what credit reference agencies know about me?

For a fee of £2, you can get a copy of your individual statutory credit report from Experian at www.experian.co.uk, from Equifax at www.equifax.co.uk, and from Callcredit visit www.noddle.co.uk. Each reporting agency will provide you with a print out of your entire credit history and your personal details.

Why am I unable to borrow when I haven’t borrowed before?

Basically, without a credit history, lenders and service providers will have no idea about what kind of risk you are. Can you handle payments? Have you been delinquent in the past? Have you gone bankrupt? Do you have a regular income? What’s your debt-to-income ratio? These are some of the questions that a blank credit history simply cannot answer for your provider

How can I build and establish a strong credit history?

You have a few different options to consider. If you currently have a pay-as-you-go phone plan, switch to an actual contract. You may have to suck up the upfront deposit or other conditions, but it will help you to start building a credit history. Pay off your bill on time each month to show that you can handle making monthly payments.

Another option—if at all possible—would be to try and obtain a bank overdraft or even get a retail store credit card. There are some credit building cards available that will allow consumers to prove that they can handle a line of credit. The credit limit will most likely be low, but it’s another great start to builder a stronger credit history. Keep in mind, store cards tend to be more expensive to borrow from so make sure you pay the balance off in full each and every month to avoid paying the sky-high interest rates often associated with these types of cards.

Getting a secured loan may be another option for you as well. It can be a little difficult without a credit history, but possibly more attainable. Secured Loan Expert Kevin Harrod says, “For the best secured loans possible, you want to present very little risk. That means the first you can take to qualify for secured loans in the future is to make sure you manage your credit responsibly now. The better you are at handling money in the short term, the more likely it is that you will get the best loan rates and terms on future secured loans. If you do not have the best credit history in the world, that’s not to say you will not be able to get a secured loan. You just might have to pay higher interest and be willing to accept lower loan amounts.” 

Any credit you have managed to obtain, make sure you try not to use it. The reason you want to watch out for this is mainly because when applying for any type of credit or loan, banks often determine what you can handle through a debt-to-income ratio, as mentioned earlier in the quote above. If you have borrowed and spent almost the amount of your disposable income, then banks will look at your ability to pay quite low and consider you a high-risk borrower. In a way, this also protects you as the borrower because you don’t want overextend yourself either. 

If you have any unused cards, do not close those accounts and be sure not to apply for more. Sometimes the lack of credit history can be due to having accounts opened and not used. But again, if you try to apply for anymore credit, this could count against you as well. Stay well within your overdraft limits also. Lenders want to see that you can manage credit and that you aren’t always looking for more.

To help keep your credit records up-to-date and accurate, be sure that you feature on the electoral roll. It is essential that credit reference agencies have a record of your current and previous addresses as continuous proof to further build your financial footprint.

What if I live abroad?

If you live abroad and have a borrowing history in the country in which you have been living, and have not ruled out returning back to the UK, you may be thinking about the possibility of getting a mortgage in the future. Understand that, your foreign borrowing history cannot be accessed by UK banks because the country from where you have borrowed cannot report your history to reporting agencies outside of the country where the money was lent to you.

However, if you have been living abroad, have kept yourself on the electoral roll, kept a UK address, and have continued to use your UK bank account, then your information will be periodically updated on your credit reports.

What are other reasons I may be getting denied?

Interestingly, the age of an applicant has some bearing on approval ratings. For example, being too old or too young will have an impact on a lender’s decision.

Although not uniform or required, lenders may take a look at your social media accounts to get an idea of what kind of person you are. If they see things they do not like, they may decide to turn you down. Not all lenders follow this practice, but it has been reported that some of them have turned people down or even approved them based on what they could find out about them on social media.

One final reason could also be a failure to prove who you are, where you live, and where you work. If your credit history profiles have little information on you, or contains information that is not necessarily correct, then they will need proof. If you cannot provide the proper proof, then forget about borrowing a dime.

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