There’s a lot to consider when you enter the world of credit, but that doesn’t mean it has to be daunting.
Providing you make sensible decisions and borrow responsibly, you should be able to build yourself a strong credit history and get the best deals later in life.
That’s why we’re here to help you make an informed decision on applying for your first credit card or loan.
A limited credit history
When you apply for credit, the lender you’ve approached will access your credit history through one of the three credit reference agencies – Experian, Equifax or CallCredit. This is because they like to see a history of how well you have managed credit in the past before they make a decision.
How you’ve managed credit in the past will influence a lender’s decision, as they want to be reassured that you’ll repay what you borrow. That’s why your credit history plays a key role in determining the types of credit you are accepted for.
However, if you’ve never taken out any form of credit before, perhaps because you’ve recently turned 18, a lender doesn’t have any history to base their decision on. This means it’s unlikely you’ll be accepted for credit with the most attractive rates.
Credit you are more likely to be accepted for
With tighter lending regulations on mortgages, your credit history is heavily taken into consideration, which means you will struggle to find a mortgage deal if you have no history of managing credit. Similarly, it’s unlikely you’ll be able to find a personal loan unless you’ve got a history of borrowing. This is because this type of loan isn’t secured against an asset, which means reclaiming the money should you fail to repay would be difficult – so you’re less likely to be accepted if you’ve never borrowed before.
There are other lines of credit that you may be more successful in applying for. If you have a current account, then your provider may be happy to agree an overdraft because they can see how you’ve been managing your account, and they have a good idea what your income and outgoings are. Bear in mind, however, that overdrafts can be expensive and are not suitable for long term borrowing.
Some credit cards, often advertised as “credit builder” cards – like the Ocean credit card (representative APR 39.9%) – are specifically designed for those with a limited or non-existent credit history, as well as those who have struggled with credit in the past. This is a good place to start if you want to begin establishing a positive credit history.
Remember to try not to make too many applications for credit in a short space of time, as each application will probably leave what is called a “footprint” on your credit history. These footprints can be seen by lenders and they may deem you to be desperate for credit – regardless of whether or not this is the case.
Building your way up
As you will have a limited credit history, you’ll have to build it up from scratch. Taking out a credit card and spending small amounts, and making at least the minimum repayment each month will gradually help to build you a positive history of using credit responsibly. This will pave way for some of the most attractive deals on other forms of credit, and should improve your chances of being accepted for other lines of credit like a mortgage or personal loan in the future.
But, it’s really important to remember that if you don’t meet the minimum repayment or spend over your credit limit, it will impact your credit history negatively. It’s recommended to set up a Direct Debit to cover at least your minimum repayment each month, as this way your credit history will improve and you won’t have to pay any charges or lose promotional offers for breaching your terms.
Now you’re on the way to building a good credit history, it’s a smart idea to familiarise yourself with things you should avoid paying for with a credit card. Head here for more information >
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.