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Before you can think about buying anything on a large scale, taking out a loan, or renting, your credit score comes into question.
A credit score is a numerical expression based on a level analysis of a person's credit files, to represent the creditworthiness of an individual.
With your credit score, banks and lenders can ascertain whether or not it is safe for them to loan you money for a certain period of time. They need to know if you will be able to pay back the amount given to them in a timely manner. This is where your credit history and credit report come into play.
Credit history: a record of a borrower's responsible repayment of debts.
Credit report: a record of the borrower's credit history from a number of sources, including banks, credit card companies, collection agencies, and governments.
If you are new to the UK, you won't have a credit score. Unfortunately it won't make any difference if you had a wonderful credit score back home because in the UK you are starting from scratch. The good news is you can do a lot of things that can help you build a great credit score.
How to Boost Your Credit Score
- Get a credit building credit card
They are not anything different than credit cards but being strict in their lending and borrowing, the credit-builder credit card helps you to improve your score better.
- Don't take out too many credit cards in a short period of time
Every time you take a credit card, your credit history is referenced which hurts your score.
- Don't borrow too much (up to your limit) regularly on your card
Always try to borrow less than 60-70% of your limit. Even if you return the amount in full, lending that high amount (compared to you limit) doesn't go well.
- Join the electoral roll (if you're eligible)
Joining electoral roll gives your address much credibility to the credit referencing agencies.
- Pay the full amount on your credit card each month
That shows your commitment as a good borrower.
- Don't check your credit score too often
Do not apply to check your score. There are some free options, rely on them to give you an idea. Creditwise, Natwest has their own free credit score checking option.
- Try not to incur any debt
That's pretty self-explanatory
- Keep your addresses up to date on all of your active accounts
Whenever you move houses, go through this checklist.
- Don't withdraw cash on a credit card
Cash transactions can't be traced thus cash advances can signal to lenders that you're being irresponsible with money during a credit check.
Credit Building Cards
Many of us open a credit card straightaway with our banks once we open an account in the UK, but I would caution against doing so for a couple of reasons. First of all, you will not be able to check your credit score without affecting your credit score on the type of card your bank will offer you. Also, the credit card from the bank works in their favor. They are hoping you spend, (and spend often!) and that you reach your credit limit each month. A credit building card would set a starting limit (typically £150-200) and based on how you spend and use the card over a period of time, your credit score and limit would slowly increase. Credit building cards also afford you the opportunity to check your credit score without damaging it.
Just because there is a limit on credit spending doesn't mean that you can't spend money on your debit card that the bank offers. Debit cards are given to you the moment you open a bank account, and can be used like a credit card (with some limitations). We will discuss more about debit cards below.
The electoral roll is a list of all the people who are eligible to vote. In the UK, you don't necessarily need to be a citizen in order to be on the register. You qualify to register to vote if you are:
- a UK citizen
- a qualifying Commonwealth citizen resident in the UK
- an EU citizen resident in the UK
If you aren't eligible for the electoral roll, don't worry! There are still many other ways to improve and work on your credit score.
How Credit Cards Work
A credit card lets you buy something on credit. This means that your bank account isn't instantly deducted upon purchasing something. Instead, you will get a bill at the end of the pay period where you will then have to pay off your debt. You have the option to pay off a minimum amount or the full amount each month. If you choose to only pay the minimum amount, you are more than likely to incur a interest charge that can vary depending on what your credit card has outlined. This interest charge is known as APR or annual percentage rate.
What is APR?
As said above, it is the annual percentage rate, or rate against which you can borrow. The lower the APR, the better for you, as it means you are considered a responsible spender.
A representative APR means that at least 51% of the applicants for the credit card in question have to receive the APR outlined while the remaining 49% are quoted a higher rate, so don't always expect to get the APR mentioned.
How to Best Use a Credit Card
Remember with each purchase you make with your credit card that you are taking out a loan. If you do not pay back this loan, you will be hit with a penalty. If you continue to not pay the total amount at the end of each period, the balance will continue to increase, and will become gradually more and more difficult to pay back. Continually paying the full balance each month (along with a few of the points mentioned above) will increase your credit score, making it easier for you to rent property, buy a car, or structure a mortgage.
A good and easy way to ensure you don't overspend and that you are regular on payments is to put costs on your credit card that don't change from month to month. What I would recommend would be to put certain utilities such as WiFi, water, TV etc on your credit card as recurring payments and then setup a direct debit to your bank account so that each month, ideally, the same amount is taken out and paid off. Make sure the limit you are setting to be spent each month is not too close to your credit limit. What I mean by this is that if your credit limit is £200, do not spend £180 a month. Keep a buffer of about £50-100 to show that you are not too dependent on borrowing.
Credit vs Debit Cards
Now let's break this down because it's important to know the difference between the two. To rehash what we've already learned about credit cards:
- You're borrowing money
- If you don't pay the total balance each month, you incur a fee/penalty
- How you use your credit card affects your credit score
- Using your credit card smartly will allow you to build a good credit score
- There is a limit to how much you are allowed to spend on your credit card
As for debit cards, the following points hold true:
- You are instantly spending the money from your bank account
- You may incur a fee (overdraft) if you try to spend money you don't have
- It does not affect your credit score
- It will not allow you to build a good credit score
- The limit on spending is only limited to how much you have available to spend
Hopefully you've all gotten a better understanding of how credit works and how you can improve your score, but I would definitely urge you to also go through our posts on how to save money and how to budget so that you can make best of your finances. Good luck!