The Need to Build Credit

This article follows on from previous articles I have written about credit and credit cards: Why I Use a Credit Card , and Is it Worth Paying for a Cashback Credit Card. This article discusses how one might go about building credit, if you have little.

Buying the Castle

There's a well-known saying in England:

"An Englishman's home is his castle"

A current problem at the moment is that many Englishmen, and women, can't get on the property ladder. This is due to many reasons but one of them is that they may not have build up enough of a credit history.

Apart from applying for a mortgage, other reasons for needing a credit history are if you wanted to take out a personal loan or apply for different types of credit cards with cashback and other rewards.

Picture from digitalart

Personal Credit Crisis

I myself had this sort of credit problem. I was applying for my first credit card with the bank that I currently do some of my banking with, a couple of years ago. The card had a 0.5% cashback, just the thing I needed to help me take my baby steps on the Multimillionaire Road.

In my naive and excitable way I went into a meeting with one of the banking assistants, and gleefully declared that I was ready! The banker gave me a sneering look and with a knowing look in his eye declared: "Ok, but let's first take a look and see if you're credit worthy". I wasn't.

I didn't understand. I explained that I had never been in debt, never gone into my overdraft, always paid my direct debits (mobile contract, gym membership, and economist subscription) on time and had a small, but regular income. How could I not be credit worthy? The banker explained that I was close to being accepted but not close enough.

The Catch 22 Credit Problem 

Thinking this was all just a bit of a misunderstanding I asked the banker what it would  take to get more credit, to become credit worthy enough to gain access to the holy grail of credit, the credit card!

Ironically he told me that to get more credit I would need to use things like a credit card.

This is stupid! To get a credit card I would need to use a credit card to get credit worthy enough for a credit card. But I wasn't allowed a credit card because I'd never had a credit card. So how was I meant to get a credit card to help get a credit card.

Seeing the Problem?

Solution to the Credit Problem

Firstly, let me make it clear that this problem if even harder if:

1. You don't have any income (for at least 6 months)
2. You've never had any direct debits (for at least 6 months)
3. If you regularly go into your overdraft
4. If you've missed payments for things
5. If you owe money

If you have any of these problems, take the time to correct these first and wait at least six months before applying.

Consider getting a free credit report. You can usually apply to free trials online. Just search "free credit history report". Plug in all your details and then look for the results. Anything above a score of 700 and you should be Ok to apply for your credit card. Make sure that you cancel your subscription to the credit report service immediately after, otherwise you'll be forking out monthly for a service that you don't want or need.

If you find that your credit score is low, or you are constantly rejected from credit card companies, here are a few tips to increase your credit score:

1. Pay for regular things such as bills, gym, mobile by direct debit
2. Focus on paying off debt
3. Buy something on credit such as a car or a laptop (this is not really recommended as it isn't particularly frugal to essentially overpay for something via interest just to get a credit card)
4. Apply for a credit card with an extremely high APR (30%-40%), this are specifically for building credit and many do not even  require a regular income. Take care with these sorts of cards and make sure that you can definitely pay off the card in full each month so as not to incur any of the extremely high interest payments

After 6-8 months of performing actions 1,2, and 4 you should be ready to reapply for the credit car that you want.

Note of caution: If you have applied and been rejected from two or three credit cards in the space of a month do not apply for any more as this can actually harm your credit score. Wait another three months or until after your 6-8 month credit building period.

Dear reader, do you have any other tips for building credit? Have you got a similar story to tell about how you built up your credit history?



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