Maybe you’ve got a thin credit history… maybe you’ve got bad credit… but who knows!?
Even though you’ve probably heard of the terms ‘no credit’ and ‘bad credit’ many times before, you might not understand what makes them different. We don’t blame you… financial jargon can get pretty confusing at times! So, we’re going to clarify the differences between no credit and bad credit, and how they can both impact your financial wellbeing.
First things first, what’s a credit history?
Your credit history (also known as your credit report) contains personal and financial information about you, and acts as a record of how well you’ve managed your finances in the past. Lenders can access your report when you apply for financial products as a way of assessing how creditworthy you are. However, the credit reference agencies only hold your financial data for six years, after which it drops off your credit history.
The information your credit history contains can include:
- Personal details, such as your name, address and date of birth
- Whether you’re registered on the electoral roll
- Your current debt amounts on credit cards and loans
- Any missed or late payments
- Details of any IVAs, CCJs, defaults or arrears
The differences between no credit and bad credit
An individual will have no credit history (or a thin file) if they’ve never borrowed or owed money. You might think this sounds like a positive thing, but lenders disagree. In fact, they see it as you having no evidence of how well you manage your finances. And because of this, they may be hesitant to approve you for credit in order to protect themselves from potential risk.
On the other hand, bad credit is usually a result of someone who has previously taken out credit and mishandled the repayments. Therefore, their credit report might show missed or late payments, defaults, CCJs, IVAs and arrears. Some financial mistakes will affect your credit score more than others… for example, a missed payment could lose you 80 points, while a CCJ could cost you 250 points!
The similarities between no credit and bad credit
Both credit histories could make it quite hard for you to get accepted for financial products – such as a credit card, loan or mortgage. You could even find it difficult to rent a property or take out a mobile phone contract.
But don't worry, some lenders specialise in lending to people with a less-than-perfect credit history. However, if you’re approved by them, you’re likely to pay a higher rate of interest. This is the lender’s way of protecting themselves due to you being classed as a risky candidate.
How to boost your credit score
It takes time to improve your credit rating, but here are 5 simple ways you can build yours from the ground up.
1) Join the electoral roll. Lenders like people who are registered to vote as it’s a reliable way of verifying someone’s identity.
2) Get a credit builder credit card – they’re designed to help people rebuild their credit score. Remember to use it sensibly though! We recommend not spending more than 25% of your available credit limit and pay the balance off instantly!
3) Your utility bills could form part of your credit history if you pay them via direct debit, so make sure you have money in your account when the payments are due. If you don’t pay by bank transfer, then make sure to set them up if you want your bills to contribute to your credit history.
4) Think about getting a small overdraft with your bank. As it’s a form of credit, it’ll show up on your credit report, and if you pay the balance back promptly it could improve your credit history. However, you should only use an overdraft that’s been approved by your bank… unauthorised overdrafts will only hurt your credit score further.
5) If you’re currently renting, sign up to Credit Ladder. They’ll inform Experian about your rent payments who’ll update your credit report – so if you pay them on time, it could improve your credit score.