How to build credit history when you’ve never borrowed before

When you apply to borrow money from a lender, the lender will need to assess you to determine how much of a risk it will be for them to lend you money. Having a history of borrowing allows lenders to analyse your credit history and repayment ability.

However, if you have never borrowed money before, your history of credit may be non-existent. No credit history means there is no track record of payments. Because of this some lenders may decline a loan application. This is because they cannot determine the level of risk you will be to them.

It may seem advantageous having no credit history. However, although having ‘no’ credit is not the same as having ‘bad’ credit, the outcome can be the same; having a loan declined.

This can be unfair, especially when you have been careful and never needed to borrow in the past (which is especially true for younger people). However, there are ways you can build your credit history to improve your future borrowing ability.

Nevertheless, even if you have no borrowing history, some utility accounts like gas electricity, water and mobile phones may appear on your credit report. Although this is sometimes not enough for a lender to grant you credit, it does mean you’re not starting completely from scratch.

Ways to improve on your credit score

Credit scores are mainly calculated from how you have repaid debt in the past. However, if you have no history of debt, there are other factors that can impact your credit score that have nothing to do with borrowing.

Open and manage a bank account

Managing a bank account will help you build your credit history as it shows you have regular income and can manage your income and outgoings effectively.

Register on the electoral roll

Registering on the electoral roll can boost your credit score. This is one of the first things lenders check as being on the electoral roll verifies your identity, proves you are living at the registered address, and prevents fraud and identity theft.

Consider utility bills and phone contracts

Many utility (gas, electricity and water) companies report to credit reference agencies, much like lenders. Having a utility bill in your name can improve your credit score. Likewise having a phone contract under your name can improve your credit score.

Furthermore, paying these by regular Direct Debit shows a record of consistent repayments. This is a positive thing for lenders to see and they can factor into their decision making when assessing loans.

Try a credit builder loan or credit card

Some lenders, including credit unions, offer credit builder loans. These are loans that are typically only available to people who have saved. Those savings are held as security for the loan. This enables someone with very little credit to begin to build up a repayment history, because the loan element is reported to a Credit Reference Agency.

If you cannot find a credit builder loan, you can try a credit card.

There are a few credit cards that will lend to people with little credit history. Taking out a card and paying back in full each month will really help. Some credit cards may offer a promotional 0% interest rate, however for those cards with interest, be careful and aim to repay the balance in full each month. If you only repay the minimum required amount you will be charged the interest rate as well. This can build up and become a very expensive way of borrowing.

Despite this, as long as you are savvy, a credit card can really help you get credit when you have never borrowed before.

Check your credit report for inconsistencies

Check your credit report to make sure your details are consistent and correct. Lenders don’t like inconsistencies between applications. For example, your date of birth should match across all of your accounts. If it’s different on one – get that provider to correct the mistake.

Additionally, it’s always best to apply using one version of your name only. For example, Samuel Smith could also show as Sam Smith or S Smith or Mrs Smith.

A Statutory Credit Report contains information that credit reference agencies hold about you. This information is what lenders use when they assess you for credit. The report is free to complete.

There are some things to consider that can potentially negatively impact your credit score

Changing address regularly

Lenders like to see stability. Regularly changing address can have a negative effect on your credit score.

Missing payments

It is important to make sure you pay bills on time and don’t miss a payment as this will reflect negatively on you.

Multiple credit applications

Making lots of credit applications will reduce your credit score. This is because lots of credit applications involve ‘hard credit checks’ which show on your credit profile. Having a lot of these in a short space of time indicates to lenders that you have a pattern of applying for loans which could be looked upon negatively. It is better to see if you qualify for a loan using a ‘soft credit check’ instead.