Advantages of building up your credit score

It is not unusual to find people who don't know what a credit rating is, this is especially common amongst people who have just turned 18 or people who have never had the need to borrow.

In financial terms, a credit score means the credit-worthiness of an individual, in other words; whether the person can be trusted to fulfil his/her financial commitment to pay back what they owe within the agreed time-frame.

To calculate your credit score, Credit Reference Agencies gather data about an individual’s past dealings with financial institutions, they’re interested in payment history, and the outcomes of those past dealings is mostly what determines a person’s score.
Also see: causes of bad credit

Advantages of having a good credit history

There’s no downside to having good credit, it puts things in your favour even in situations you wouldn’t expect, below are the 3 main advantages.

  • 1. Makes borrowing easier and cheaper

    trust hand shake

    Think of a credit score as a reputation; People who build a reputation of always paying what they owe will gain the trust of everyone in the long run.
    Even if you don't need to borrow money in the near future, it's important to work on your reputation because credit history is built up over many years.

    Should the need arise in the future, you won’t have to try too hard to find a lender, in fact you may be in a position where you can negotiate a lower interest rate; the lender will know from looking at your credit score that you’re a good customer who can easily go to one of their rivals.

  • 2. You can get things cheaper

    When you buy something on credit, for example a car or a fridge, the credit is usually provided by a third-party financial institution and not the retailer themselves, upon application your details are passed on to the credit provider who will carry out a credit check on you. It is the credit provider that sets the interest rate, and more than anything, this depends on the applicant's credit history.

    This creates a situation whereby, despite buying exactly the same product from the same retailer, two customers can end up paying different amounts; the one with bad credit always pays more.

  • 3. Can help when finding a house to rent

    Some letting agents do credit checks on potential tenants in an effort to weed out bad tenants, if you have a less than satisfactory credit rating, you might be asked to put down a bigger deposit or get denied the house all together. But if you have good credit, you'll have no such issues.

How to start building credit

With credit, you have to use it in order to get it; you cannot stand still and wait for your credit history to come to you.

First, you should make sure you're on the electoral roll as this is the first place creditors go to confirm your details when you make an application.

If you're completely new to credit, a credit card is probably the best way to go about building good credit; the good thing about credit cards is that as you continue to use it and pay off the balance, your card provider will continue to report to credit reference agencies, thus adding positive points to your credit history, by contrast loans have fixed terms, therefore once paid off you don't get the continuous boost. It is important however to avoid bad instances such as missed payment or late payment as these are also reported.

If you already have debts then simply reducing your debt while avoiding new debt can boost your credit. How fast your credit recovers depends on how bad your past history was; for instance if you have a bankruptcy, that may take 6 years to come off your record.

Checking your credit score

The 3 main credit reference agencies in the UK are Experian, Equifax and CallCredit, they're by law required to provide you, on request, with a statutory credit report for a small fee of £2. You can request yours from each below:
- Experian Statutory report
- Equifax Statutory report
- CallCredit Statutory report
On top of that they also offer instant credit check services for a monthly subscription fee; however, for most people a single annual check will be sufficient.


  • 1. Gives you a chance to correct mistakes
    Credit reference bureaus get their information from various sources, they take the information they get as accurate unless revised by the original source or disputed by you. An example mistake can be a financial institution reporting debt as unpaid whereas you know you've paid it off. In such cases you can call the reference agency and dispute the reporting; often they're willing to work with you to correct the mistake.

  • 2. Can alert you when you've been a victim of identity theft
    It is very difficult to know when someone has taken a copy of your details; the methods used often leave no evidence. But in most cases the aim of identity thieves is to use your details to apply for something, if it happens to be a financial product e.g. a credit card or a loan, more likely it will show up on your credit report. By accessing your credit report regularly, you can identify things that you did not sign up for and report them as fraudulent.

  • 3. You'll have a good idea what you can qualify for before applying
    When you get a copy of your credit report, it gives you an idea where you fall; there are those with very good credit, fair credit and those with bad credit. If you find that you have good or fair credit, then you know you have a chance of qualifying wherever you apply. But if have bad credit, it might be detrimental to apply at some high street banks; a rejection creates an unnecessary credit inquiry, which other lender will be able to see and therefore damage your chances with them.

    4. It puts you in a better negotiating position
    Sometimes when getting a loan, the lender can make you feel like they're doing you a favour, thereby convincing you to accept the first offer you get. In reality, most lenders only approve once they've realised you're a good potential customer. If you know in advance that you have good credentials, getting approved does not feel like a favour and you can negotiate for a lower rate knowing that other lenders would also be happy to have you as their customer.