Advantages of building up your credit

It is not unusual to find people who don't know what credit 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, credit means the credit-worthiness of an individual, in other words; whether the person can be trusted to fulfil his/her financial commitments. This can be determined by looking at the individuals past dealings with other financial institutions, this is called a credit history.
Also see: causes of bad credit

Advantages of having a good credit history

1. Makes borrowing easier and cheaper
Even if you don't need credit at the moment, it's important to remember that credit history stays with you for many years. Should the need arise in the future, a good credit history would give you a big advantage; you would be able to qualify with most lenders, not only that, you would also get their cheapest rate.

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 is 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 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. However, it is important 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.