How to establish a good credit history


One of the most frustrating problems that many young people face on the road to financial independence is that they have no ‘credit history' and, as a result, they have trouble securing affordable loans. Banks and building societies often decline these applicants because they have ‘thin credit,' meaning there is simply too little information on an applicant's credit file to make a lending decision.


That's why if you're a student or a young professional looking to become financially independent, you'll need to build up a good credit history as soon as possible. 

What is a credit history?
Your credit history is an accumulation of information held about you by a credit reference agency. The three UK credit reference agencies -- Callcredit, Experian and Equifax -- collect information about you, which they then provide to lenders when you apply for credit.

The information they hold includes details of any financial accounts you have opened, your address history, date of birth and any other public records about you (such as court records). They obtain the information from banks, building societies, the voter's roll and from other public bodies, such as the Courts.

Without a good credit history, you will find it difficult to be agreed for any sort of lending, such as a personal loan, credit card or mortgage. Lenders use the information on your credit file to assess whether they think you are a good risk and whether they believe you will maintain repayments to your credit card or loan.

Establishing a credit history -- in three steps
If you're currently struggling with a thin credit history, here are three steps to help you build it up.

1. Get a loan or credit card. By taking out a small loan or credit card, you can start to build up a substantial credit history -- assuming, of course, that you manage your account responsibly. Make sure that you make payments to your loan or credit card in full and on time every single month. This will show potential lenders that you are capable of managing credit and that you pay your debts responsibly every month. It will also help you learn about credit cards and budgeting, which are important financial lessons.

2. Get on the electoral roll. If you are not registered on the electoral roll, then it is almost certain that you will be refused for credit. A lender finding you on the voter's roll is one of the most important aspects of any credit scoring process.

You don't have to wait until the annual registration form is delivered to you. You can register with your local council at any time. Indeed, many councils will allow you to register for the electoral roll online.

3. Check your credit history regularly. One of the key steps when learning how to build a good credit history is to regularly review the progress that you are making. The three credit reference agencies all have systems where you can monitor your credit report and check that all the information is accurate and up to date.

Always make sure your credit report is updated with any changes of name and address. In addition, ensure that you close accounts that you don't use and that the closure is noted on your credit file. 

If you are planning to apply for any credit, then it is always wise to check your credit report before you apply. This will ensure that your report is as good as it can be when you approach a lender.

See related: Study: Many Brits lack key knowledge of credit scores; How to get your credit report, score

Published: 28 June 2011