Credit: How to build it and maintain it

Credit can be a very fickle thing. It is something that we need to use to operate in this society, however it seems to be an opaque process that only a few know how to work around. In this piece, I will give a glimpse behind the curtain and explain exactly how to build credit and therefore maintain it to avoid things such as Line of Credit Decreases or Persistent Debt.

Building credit can seem rather daunting. Whether you are someone who hasn’t taken anything out in credit but now need a mortgage, or someone who has gone through a string of bad luck, the idea of slowly building up a credit score can feel like a very uphill task. Below I will detail some quick ways to boost your credit score and appear more appealing to companies who offer credit.

Understand your current credit situation

The first thing that needs to be done is understanding of your own credit score. You want to know the profile that you are presenting financial organisations. Most Credit Reference Agencies {CRA} (eg Experian, Clearscore, Equifax) allow a number of personal credit searches a year for free. I would recommend to look up your credit score and using it as a guide. Please bear in mind that quite often the credit score will have been created by the CRA themselves and individual companies may use their own metrics. They will have access to each individual credit CAIS that you have, seeing whether you are paying in time, how many recent credit searches you have had, if you have overdraft usage, and whether you are paying revolving (credit card) balances in full or the minimum balance. Just do not request too many credit score checks on yourself as that can effect your score

Building the report

If, on reflection, you do not have many lines of credit or have a number of derogatory records, it becomes important to build this up. One way that you can do it is reporting your rent payments to the CRAs – using services such as https://www.creditladder.co.uk/. This will allow you to have a regular payment to your landlord and build a profile up. Remember however not to go late! You can also look to take out a phone contract if you have not already. They report the balances directly to the CRAs and can add to your good profile!
Maintaining existing credit

In these changing credit environments, as well as with overview from the Financial Conduct Authority, financial organisations are required to look at your existing credit to determine if they are lending responsibly. This can involve searching for things that you may not feel is derogatory. For instance, if you pay minimum on a credit card, that can be seen as “revolving” the balance. It can lead to you paying more in interest and fees than paying off the balance. The FCA have deemed this “Persistent Debt” https://www.fca.org.uk/news/press-releases/fca-tells-credit-card-firms-review-their-approach-persistent-debt-customers and has mandated the financial organisations eventually cancel customers who are in this state for too long. As such, paying minimum or close to minimum on products where you can has been mandated as something that can be bad, even though it is totally permissible. In order to build up and maintain your credit score, I would recommend paying off at least 50% or more off the balance every month. That should show that you are creditworthy and avoid any decreases

The problem and temptation with overdrafts

Overdrafts can feel like free money – your bank is allowing you to have less than 0 and in some cases for absolutely nothing at all, why not use them? In fact, some people swear by them and never see a positive balance. There is a good reason not to use them however. It is the one thing that they give to CRAs – whether you are using an overdraft or not. For a financial institution, if they see that in the place that you store your money, not only do you not have money but in fact are borrowing from the bank, they will be less likely to want to lend to you as well as there may be questions of whether you can actually afford further credit as you have no saved funds. Therefore if you want credit, avoid overdrafts!

Other lines of credit

It can be tempting to accumulate unused credit, for instance £5000 from one company £3000 from another etc. However please note that when requesting further lines of credit, especially if you haven’t used these amounts, these unused credit lines will be seen as available credit to you. Therefore a new financial institution may only be able to give you a further £1000, as you already have £8000 externally. This can be why some companies will offer you huge amounts but others cannot – the overall lines are taken into account

Credit searches

Every time that you apply for credit, this is known as a hard search. Just for your knowledge, financial institutions will continuously soft search you for their risk calculations. This will not have an effect on your credit score however. If you do too many applications (generally more than 6 in a 12 month period), this can significantly effect your creditworthiness. It looks like you are desperately seeking funds, even if that is not the case. Therefore please be aware of that and only apply for lines of credit in moderation to avoid this.
Therefore, using these tools and tips should help you both build your credit and maintain it. Of course, external factors may also effect how much credit you can take out, but sadly there is not a lot you can do about that.