How to establish credit for the first time

Whether you’re applying for a credit card, buying a car on finance or trying to get a mortgage to buy a home, you will need to have a good credit rating. Here’s how to establish credit so you can increase your chances of being accepted for the best deals when you want to borrow.

Why you need to establish credit

Before a bank, mortgage lender or finance company will lend money to you they will look at how much of a risk you are. What they want to know is simple – will you pay them back. Your credit information shows them how you’ve managed credit in the past so helps them predict whether you will make your repayments in the future.

If you haven’t established a credit history, potential lenders can’t see if you’re reliable with money. This can lead to your application being refused.

Building a good credit rating will not only help get your credit applications accepted, it can also help you save money. That’s because when you have a good credit score you are more likely to be accepted for credit at the best rates.

What is a credit score?

When you apply for credit – whether that’s a credit card, personal loan, mortgage or anything else – a lender wants to know if you will pay your debt back on time. They do this by taking a look at your credit history.

Your credit score is based on several factors including how quickly you pay back money you have borrowed, if you have any outstanding debt, and whether you have any missed or late payments in your past.

You can find out more by reading our guide to what affects your credit score.

Is no credit worse than bad credit?

If you have never had credit you will have a low credit score because there is no evidence of you borrowing sensibly in the past.

So, having no credit can result in a low score (poorcredit rating) in the same way as having a poor credit history (missed payment/defaults etc.) can. If you’ve mismanaged your debts in the past read how to improve a poor credit rating.

How to establish credit

There are lots of ways you can start to build your credit history.

  1. Open a bank account. Having a bank account helps you establish a credit history in a number of ways:
    1. It shows you have a reliable, ongoing relationship with a bank
    2. It proves you are a UK resident
    3. It can help you manage your money and pay your bills on time
  2. Use a credit card. Once you’ve been using your bank account sensibly for a while you could apply for a credit builder credit card. This is a credit card designed to help you establish credit. Use it and pay off the balance in full each month to create a good credit history. It will help your credit score if you keep your spending to below 30% of the agreed credit limit.
  3. Register to vote. Putting yourself on the electoral roll not only means you can vote in elections; it also improves your credit rating. Companies use the electoral roll to check you are giving them the correct name and address. Plus, it is a sign of reliability and stability. Registering to vote is a quick and easy way to boost your credit score.
  4. Get a mobile phone contract.Taking out a mobile phone contract can help you establish credit. Make sure you pay your bills on time and it will show potential lenders you are reliable.

Best way for a young person to build credit

If you’re just starting out in the financial world then it’s important to start to establish credit:

  1. If you rent your home, use the Canopy app. Make your rent payments on time and Canopy will build a reliability score which is fed into your Experian Credit Report.
  2. Have a utility bill in your name
  3. Get a mobile phone contract
  4. Register to vote

How long does it take to establish credit?

Taking the steps to establish credit may only take a few hours but it can take a while to have an impact on your credit score. This is because banks and lenders usually only update your credit report every four to six weeks.

Also, it will take a few months before any new credit accounts begin helping your credit score because lenders often see new credit as a sign of risk.

Common mistakes when you start building credit

When you’re establishing credit for the first time make sure you don’t make one of these common mistakes:

  1. Applying for too many credit products. When you apply for credit the lender will search your credit report. There are two types of search – hard and soft, you can read our guide to discover more about the differences between them. Hard searches are visible to other lenders. If one sees that you have made lots of applications for credit it makes you look like you may be struggling financially. This could damage your credit rating.
  2. Late or missed payments. Just one late or missed payment for a loan or credit card can put a dent in your credit score. Set up direct debits to make sure you make all your repayments on time.
  3. Getting into debt. Make sure you only use your credit card for things you can afford. If you end up building a debt you can’t repay straightaway it could lead to expensive interest charges, making it harder to pay off what you owe. This could lead to financial problems which could damage your credit rating.
  4. Not paying off a credit card. A credit card can help you establish credit, but it isn’t the credit card debt that improves your credit score. It’s how you manage the credit available on the card. Keeping your balance low in relation to the limit is seen as a positive sign by lenders. It’s something we call credit utilisation and is the percentage of your credit limit that you’re using. So, if you have a credit card with a £1,000 limit and you have a £500 balance, your credit utilisation is 50%. Lenders prefer to see a low utilisation percentage, ideally below 30%.

How to monitor credit?

You can check your credit rating for free so there’s no reason not to keep a close eye on it. Monitoring it regularly means you can see how it’s improving and also quickly fix any problems before they impact your credit rating.

Get your Credit Score with Experian