No credit vs bad credit history

Although having no credit history can be good in the sense that you have no existing debt, you will inevitably struggle to get any loan if you need one. The good news is that dealing with no credit history is much easier than fixing a bad credit file. Building your credit report will give you a much better chance at getting approval and will help you get a better interest rate.

What does ‘no credit history’ mean?

No credit history simply means that you have not borrowed money in the last 6 years. This is the length of time that something will stay on your credit report for, so you might have borrowed prior to this but it now won’t appear.

There are a number of reasons why you might not have a credit history. It might be because you don’t agree with taking out loans and have looked for alternatives, or that you have been in a position where you’ve not needed to borrow. You may otherwise be in education or a recent graduate and not had a student loan or credit card before.

The issue with not having a credit history is that lenders have nothing to base any type of finance agreement on when you need it. This is because they won’t have any evidence to show that you are a reliable customer who will consistently make repayments on time. This means that lenders will often reject your application because they don’t have enough information about you.

Why it’s different to bad credit

In comparison to having no credit, a bad credit history is more difficult to fix. That’s because the activity on your credit report is negative due to previous missed, late or partial repayments. These factors make it less likely for lenders to approve your loan applications, as they will make their decision based on how you have previously paid back. If you do have a bad credit history then you should look into ways to improve your credit score before making applications.

How to establish a credit history

A non-existent credit history is a more ideal situation to be in than having bad credit. This is because there are things you can do to build up your credit history, improving your chances at getting approved for finance.

Below are some of the things you can do to help build up your credit report:

Using credit cards and store cards

Even if you can afford to otherwise, using a credit card or store card for making some of your payments can be an effective way to build up your credit score. This is only providing you pay off the amount each month in full. If you’re struggling to get accepted for a credit card, you might want to consider cards specifically designed to help improve your credit rating.

Set up Direct Debits

Setting up regular payments for utility bills or your mobile phone contract can help to build your credit score. This is because it shows lenders that you consistently make payments when they are due. You should always make sure that you have enough money in your bank account to make these payments.

Get on the electoral role

If you aren’t on the electoral role, you are unlikely to get any credit. Credit reference agencies use this information to check your address and ID. If they can’t easily obtain this information then they are likely to reject your application.

If you aren’t registered to vote, or you’re unsure whether you are, then you can use the Gov.uk website to check or apply at any time.

Stop making finance applications!

Every time you make a finance application it adds a footprint to your credit file, so lenders who look at your credit file will be able to see what you have applied for previously and whether you’ve had approval or not. Making several applications in a short time period can look as though you are desperate for credit, so it’s best to spread these out over time.

Check your credit score

Keep on top of your credit score, especially if you have been rejected. Websites including Experian, Equifax or Callcredit can give you access to this information.

The Money Advice Service also offers some further advice on getting credit for the first time.

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