A good credit is a must if you want to borrow money at a lower interest rate. If your credit rating is less-than-perfect, you will pay high interest rates and if your credit score is stellar, you will get the best deal. What if you have no credit history? What if you are borrowing money first time?
A combination of reasons can account for an impaired credit standing. You may not have paid your bills on time, you have borrowed more than your affordability, your credit length may have been very longer, or you may have applied for several loans within short period. Whatever the reason, a lender will raise doubt on your repayment capacity and charge high interest rate.
If your credit history is nil, there will be one reason only – you do not use credit at all – but you are not going to get the best deal. You need a good credit history to get a loan at affordable interest rates, but you need to take out a loan to develop a credit history. Here are some ways you can use to build your credit file.
Apply for a secured credit card
You cannot apply for a traditional credit card if your credit rating is not stellar, but you can apply for a secured credit card as long as you have cash. These cards require you to back the deal with cash. The deposit amount will be as same as your card limit. For instance, you need to deposit £1000 to get a card with £1000 limit.
These cards work as any other credit card. You can use them to buy anything that falls within the limit, but you will have to pay off the balance as soon as possible. Otherwise, interest will continue to add up. The credit card company will return your deposit amount when you close your account. If you use your secured credit card instead of debit card, your credit history will start building up.
You should be very careful while using them because they may act against your credit history. The rule of thumb says that the outstanding balance should not be more than 30% of your total credit card limit. For a fair credit rating, you should have a low credit utilisation ratio. Remember that these cards can help you build your credit only when your credit card company informs credit bureaus of your payments. Since these cards are associated with annual fees, make sure that you do enough research to get a card with low fees.
Borrow someone’s credit score
You can become an authorised user of someone’s credit score in order to build your own. Your name will be on the account if you are an authorised user. It means that every activity like payments and the outstanding balance will show up on your report even though you do not have access to that account. This can help you qualify for a good deal, but make sure that you become an authorised user of someone’s score who does not make defaults. At the same time, you will also be careful with repayments. If you fail to pay off, it will not only damage your credit rating but also that person’s score. After being an authorised user, you can take out even a payday loan with no credit check at a lower interest rate.
Arrange a guarantor
Even though you have not followed any of the tips mentioned above, you can apply for impressive deals. If you arrange a guarantor with a good credit score, a lender will sign off on your application. The lender does so because they can call upon a guarantor to pay off the debt in case you make any default. Arranging a guarantor is not a bad idea, but make sure that you will pay back the whole of the debt. Otherwise, it will damage the guarantor’s credit rating too. A guarantor can also help you apply for bad credit loans at competitive interest rates.
The bottom line
If you have bad credit issue, you can follow the aforementioned tips to build your credit. However, make sure that the lender and the credit card company informs credit reference agencies of your payments. Paying back the debt is not that easy, so be careful with your budget. Before you borrow money, you must analyse your income sources and repayment potential. Otherwise, you will fall in debt.