It might not be covered in school, but taking steps to build a strong credit score is one of the most critical financial tasks for young adults. Starting early means it will be strong when it needs to be, helping you optimise your finances as you forge your future. So, what exactly is a credit score, and how can it be developed? Get to grips with the basics by reading this straightforward guide.
What is a credit score?
A credit score is a three-digit number that indicates to lenders how well you manage money. The higher the number, the better the score.
Scores are created by UK credit reference agencies based on information from public records, financial institutions like banks and other service providers.
Why is your credit score important?
Lenders look at credit scores when reviewing applications for credit. ‘Credit’ lets you borrow money and repay it over time, usually with interest, enabling you to make large purchases or cover unexpected costs where necessary. Examples include mortgages, credit cards, personal loans and handset-and-service-plan phone contract bundles.
Having a strong score proves to lenders that you’re responsible with money, making them more likely to approve your requests and potentially giving you access to better rates. They will also consider:
• Your personal and financial information – including your address, employment status, salary and regular expenses
• Affordability – in other words, whether you could reasonably keep up with the repayments
• Your account history – whether you’ve borrowed money in the past, and how well this credit has been managed
How can you build your score?
1. Start with a credit-building card
When you’re starting out with personal finance management, you have a limited or non-existent credit history. This can make it difficult to get accepted for the financial products that can help you boost your score.
Look for special products like a credit building card or secured credit card designed for those with no credit history. They typically have lower limits and higher interest rates than standard credit cards and report your monthly activity to credit bureaus immediately (rather than after a few months). Using the card sparingly and paying off the full balance every month before the due date demonstrates consistent, low-risk behaviour, and will help you build your score.
2. Get authorised on an account
If you don’t want to take on responsibility for borrowing yet, you can consider getting authorised on the account of a trusted family member instead of having your own card. Make sure this family member has an impeccable credit history.
You won’t have access to their credit card, but you can reap the benefits of being associated with the positive credit history without being financially responsible for any debt. The account details such as length and payment history will be added to your credit report, instantly establishing a baseline score.
3. Make your payments on time
One of the simplest ways to demonstrate responsibility with money is ensuring your essential payments, like utility bills and rent are paid on time. It proves an ability to properly prioritise spending, supporting the idea that you would borrow responsibly.
If possible, arrange for all your bills to come out of your account at the beginning of each month as automatic direct debits. This ensures payments are made in a timely manner and makes it easier to manage the rest of your funds throughout the month, as you can see exactly how much you have left to spend and save.
4. Register to vote
Something you can do immediately to boost your credit score is registering to vote. Having your name and address on the electoral roll makes it easier for lenders to cross-check your personal details, so your score increases as a result.
