Building credit - why it matters and how to do it? (UK)

April 12, 2020

Why should you care about credit?

Sometime in the future, you’ll want a phone, car, or house. Unless you have the cash to buy these outright, the seller (or a 3rd party) will perform a credit check and, hopefully, offer you a loan such as a mortgage.

This credit check will analyse your credit report—a history of all your previous borrowings and repayments—and determine if they should offer you a loan and on what terms.

If you are young, you’ll likely be outright rejected for having no credit history. It happened to me and most of my friends. It’s pretty easy to fix, but it can take a long time to work (1-2 years). You will want to fix it as soon as possible. Give your future self optionality. Below are the steps to fix it.

This guide is for people in the UK. I don’t think it will translate to other countries.

How to improve your credit score?

  1. Get on the electoral roll and make it public.
  2. Check your credit report. Download the Experian and ClearScore apps (they are free). Double-check that there are no errors on the report—if there are, fix them asap, then wait 1-2 months before continuing. The credit score is a rough indicator of how good your credit score is, but most lenders will look at your whole report rather than the score.

  3. Check your eligibility for credit cards. Use the MoneySavingExpert Credit Card eligibility tool to see which credit cards you are eligible for.

    a) Eligible for a credit card? If you have no/poor credit then you’ll likely only be eligible for a credit builder card. The exact one doesn’t matter too much as you’ll switch to a better card when your credit improves. Order it and, if you are approved, go to step 5. If when you order the card you are rejected, then don’t apply for any more. Each time you apply it will hit your credit score. Instead, got to step 4 and retry step 3 in ~6 months when you have improved your credit score.

    b) Not eligible for any cards? Don’t worry—I and many of my friends had this exact problem. Got to step 4.

  4. Get a SIM-only contract. Apply for a SIM-only contract. Each full payment will be logged on your credit report.

    a) Got a SIM-only contact? After 6-12 months, go to step 3.

    b) Can’t get a SIM-only contract? If you are rejected from a SIM-only contract then it gets tricky. If you have friends/family who are nerdy about credit reports you should ask them for advice. If you have problems with your credit report fix them first and wait a few months. Another solution I’ve come across is Loqbox.

    With Loqbox, you agree to pay between £20 and £200 each month to Loqbox every month for a year. Loqbox then tells the credit reference agencies that you have paid them. At the end of the year, you get your money back. Each month your credit score should improve slightly. After 6-12 months go to step 3.

  5. Using your Credit Card. Set up a direct debit to pay it off in full each month. Attach a subscription to it, such as Spotify, and over time this card will build your credit history. Don’t ever withdraw cash using a credit card. Keep this account open for a long time paying off the subscription. The longer you keep your accounts open, the better for your credit report.
  6. Increasing your credit limit/getting more credit cards. In general, the larger credit you have access to and the lower credit utilisation, the higher your credit rating will be. Once you’ve been using your first credit card for 6-12 months you should be able to increase your credit limit either by increasing the credit limit on your existing card or getting another credit card. If you are eligible, you’ll likely want a new credit card which also has some perks (although these perks are not as good as the US).

Which credit card should I get?

MoneySavingExpert has an up-to-date list of credit cards. As I’m writing this, the best option is the Amex Platinum Everyday—confirm that you are eligible before you apply. You’ll need to spend a minimum of £3,000 in the first year. If needed, ask your parents to book the family holiday through the card.

What makes a good credit report?

  • Long history of repayments
  • Relatively large access to credit
  • Relatively low credit utilisation
  • Accounts open for a long time

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