If you are applying for credit for the first time, you may feel overwhelmed about your application. Credit can help you secure vital things, such as a credit card or a loan for a car, making it essential you apply for credit in the correct and most effective way. No credit score or a bad credit score can make it almost impossible for many borrowers to get a loan (Source: Growing Power – Bad Credit Loans).
Below we outline everything you should know about applying for credit for the first time.
What is a credit score?
Put simply, a credit score is a number that indicates how much of a credit risk you may be to a lender. The higher your credit score is, the lower the risk you are. Your credit score is based on your financial history, such as how well you’ve managed debts and how much money you have borrowed in the past. A credit score can influence who is willing to lend you money, how much you can borrow and what interest rate you will receive for your loan. Therefore, you should try to build your credit score as high as possible before applying for credit.
How to start building a credit score
Quick, simple steps to building a good credit score…
1. Open a bank account
Open a UK bank account and manage it responsibly. Ensure there is enough money to cover your expenses as this will prove you are responsible with your finances. A current account can contribute to a positive credit score even if you do not have an overdraft.
2. Start some direct debits
Set up some direct debits to be paid from your bank account, for example, your phone bill or electricity bill. Some energy providers even offer discounts for direct debit payments, making this a win-win scenario.
3. Never miss a payment
Once you have set up your direct debits, however, it is important you do not miss a payment as this will negatively affect your credit score. If you do not have enough funds to cover your direct debits, contact the companies you have arranged direct debits with, explain your situation and ask to change the payment date to later in the month.
Things that may prevent your first-time credit application from being approved
Aside from your credit score, there are other factors which may cause your credit application to be rejected.
1. You are not registered to vote
While being on the electoral register may not seem directly related to voting, many loan providers use the register to check that you live at your home address. So, even if you do not plan on voting in a general election, you should still register as soon as possible.
2. You have financial connections with other people
If you apply for a joint credit agreement, for example, a mortgage for a home, with another individual, their credit score may have an impact on yours. If you don’t want an ex-partner or family member’s credit rating to affect your score, close all joint accounts together and ask for a notice of disassociation to prevent your accounts being connected in the future.
How long does it take to build a credit score?
If you are starting to build your credit history from scratch, it will most likely take around six months to build a good score. The longer you have to prove your financial responsibility, the better, so you should start building your credit rating as soon as possible. Whilst you build your credit score, you should consider the type of credit you want to apply for and how you will repay any money you borrow. Never try and borrow any money you know you will be unable to pay back.
Who calculates my credit score?
There is not one definitive UK organisation that calculates credit scores. Rather, each lender will calculate a credit score based on their criteria. Although different lenders may have slightly different criteria, your credit score should not differ too much between different lenders.
Top tips for applying for credit for the first time
1. Collect all the relevant information
To make the application as quick and easy as possible, collect all the information you will need to complete the application form. For example, you will need your employer’s name and company address, your bank account details and a recent paycheck or proof of your annual income.
2. Create a chart of your monthly incomings and outgoings
Create a list, chart or flow diagram of the monthly incomings and outgoings of your bank account, and ensure you will have enough income to pay back your loan in a timely manner.
3. Know your credit limits
The credit application company may ask for details about existing credit limits or commitments you have, so ensure you are aware of every credit commitment you have.
4. Check your credit report
Check your credit report is up to date and correct before applying for credit to ensure you get an accurate response.