It feels like a catch-22 situation: you can’t take out credit cards, loans or mortgages without a good credit score, but in order to build your credit score you need to use a credit card or make loan repayments.
This is a tricky situation to be in, as it means that it can be difficult to access financial products or services without having to first take on short term debt.
And, while we absolutely believe that credit cards can be used responsibly, it’s also true that they can provide an unwanted temptation.
So what’s a young person to do? Well, there are actually several ways to start proving that you’re financially responsible and building your credit score without having to start managing risky debts.
Join the electoral register
This is absolutely essential: without joining the electoral register, you won’t be able to prove your identity to potential lenders – this means that they won’t be able to accept credit applications that you make.
There’s no point working on building your credit score without joining the electoral register first – simply go to the Government website and register to vote.
Make sure your name is on household bills
If you share your home with flatmates or a partner, then don’t just let them take care of all of the bills. At the very least, you should get your name on the bill alongside theirs.
Then, when the monthly payments are made they will start to contribute towards your credit rating. Of course, if this is going to work then you need to make sure that the bills are paid on time!
If you’re living at home with parents, see whether they’ll let you take responsibility for some of the utility bills.
Clear any existing debt
Debt that you’ve accrued in the past – even debt that is several years old – can have a negative impact on your score, so repaying debt could help you improve your standing.
If you have a large amount of debt or you’re struggling to repay the debt that you have then it may be a good idea to contact a debt charity such as StepChange. You’ll also find lots of informative articles on this site.
Make sure your rent payments count towards your credit file
Are you paying rent directly to your landlord every month? Despite the fact that this is probably your largest outgoing, it’s unlikely that the timely payments you make ever get recorded.
This means that one of your biggest financial commitments is being completely ignored, and it seems particularly absurd that mortgage lenders don’t see this information when they’re making recommendations.
If you’re reliable with your rent then you could have a lot to gain by using a third party rental exchange to make your payments. By making your payments through their credit ladder platform, you ensure that they are reported back to Experian, one of the three credit reporting companies.
We recommend that everybody monitors their credit report on a semi regular basis. This way, you can make sure you always know how healthy your finances are in the eyes of potential lenders – an important piece of knowledge to have when planning for the future.