Move aside Millennial culture, Gen Z are here. If you were born after 1995 then the future is yours. Woop. It could also mean you’re new to credit-files. Well, hate to break it to you, but you’re an adult now. The sooner you read our guide, the better off you could be later.
We’re Amigo Loans and we’re here to tackle the misconceptions around credit files.
We know - credit files are pretty boring.
Credit files are actually super interesting. Well, kind of. Okay, they are dull, but it doesn’t matter because they’re also super important. Paying attention to your credit file now could do you good later on - just like eating your greens.
What your credit file does
Think of the future. Do you see a shiny car and a nice house in the hills? A fancy job to fund it all?
Well you better start thinking about your credit score then. Here’s some things your credit file will impact:
- Car finance - if you want a brand new car on a pay-monthly plan, chances are you won’t get a good deal if your credit score isn’t top-notch.
- Tenancy contracts - landlords are unlikely to want a tenant that doesn’t have a good record of paying back their bills.
- Job applications - a lot of employers will run a credit check before hiring you, especially if the role involves dealing with money.
- Buying a house - it doesn’t matter if you’re not even close to thinking about mortgages yet; the decisions you make now could have huge consequences later on.
In summary, your credit score is a big deal. Having a good credit score means getting the best deals and rates, and the sooner you start paying attention, the better position you’ll be in for the future.
A concise but excellent summary of credit scores
But how do credit scores actually work, you ask?
Well, lenders and banks like to predict peoples’ future behaviour based on how they’ve acted in the past. Taken out a loan and not paid it back? They’ll be unlikely to trust you again.
What the ‘credit reference agencies’ do is record all of a person’s financial information together in one place. This is your credit file. All that information then gets condensed together and comes out as a three digit number - your credit score.
A high credit score is good and means lenders will trust you. A low credit score, err, isn’t seen as good and means you could find any applications for credit will be declined.
The even more concise summary of credit files
The shorter version - your credit score is a way for lenders and banks to instantly judge you without ever having to speak to you in person. Kind of like being rejected on Tinder, except your credit score is based on your financial behaviour rather than your physical appearance.
Does everyone have a credit score?
Yes. Well, almost.
If you have a bank account, a mobile phone contract, or even just a utility bill in your name, the chances are you’ll have a credit file where this has been recorded. And if you have a credit file, you’ll also have a credit score. Even if it’s only based on a bank account you opened at 16.
Actually, that leads us on to . . .
The issue of a thin credit history
So lenders use your credit score to predict your future behavior. But if there isn’t much information on credit file, your credit score isn’t really giving them much to go on.
A strong history of credit on your file can be just as important as the actual credit score. That’s particularly important if you’re just starting out and haven’t got a whole lot going on in your name.
So the big question - what do you need to get your credit going?
How to give your credit score a kick-start
Here are some basic tips on building your credit file from scratch:
- Open and manage a bank account - if you haven’t already, this is the best place to begin. Maintain a positive balance, don’t go overdrawn, and prove to the world that you’re trustworthy.
- Apply for an overdraft - your bank may let you take out an interest-free overdraft which can be helpful if you ever need short-term credit. If you use the overdraft, make sure you always pay at least the minimum payment, and pay it off in full before the interest-free period ends. Otherwise you could end up paying a fair bit which kind of sucks.
- Don’t miss any payments - whether it’s for your phone contract or any bills, this sort of stuff can be marked against you.
- Get on the electoral register - easy but important. Register to vote on the government website.
Looking into your own credit score
Feeling inspired? You’re welcome.
Before you rush off to build the perfect credit score, here’s some information to end on.
There are three main credit reference agencies in the UK: Experian, TransUnion, and Equifax. These are the guys that take all your information, squeeze it together, and come out with a number - your credit score.
They each use their own scoring system and so the number you get from each one will be different. If you’d like to look into your credit file, there are a few sites such as Credit Karma, ClearScore and Experian where you can sign up for a free account and check your credit report any time you like.
Good luck and happy building.