Assuming you have taken the important first step of checking your credit file and corrected any errors you have found, taking on credit to rebuild your credit standing is the next step. Your eventual aim should be to improve your credit score.
Taking on credit is something that cannot be rushed. And there is certainly no short cut, as this is an important process in your credit rebuild. One thing you must not do is to take on more credit than you can reasonably afford to pay back. You do not want to get into the same financial mess that ruined your credit record last time. And if you are now seriously in debt do not apply for more credit cards, but seek advice on how to deal with your existing debts.
It’s vital to know how to budget properly, otherwise your finances will just run away with you. Unfortunately too few people know how to set up a workable budget and they wonder why their outgoings are consistently greater than their incomings.
Taking on Credit Means Having a Bank Account
If you have previously been made bankrupt or been in an Individual Voluntary Arrangement (IVA) then it might be you don’t have a bank account. Opening a bank account is important, as it opens the door to other financial services, and starts you off again enabling you to build up a good record of credit and repayments.
Not all banks will want to know, but you should find a few who are willing to open an account for you, even if it means no overdraft facilities for a period of time. The Co-op bank has a good reputation for allowing even those in a current IVA to open an account with them. The idea is that over time you will prove to be trustworthy, have money going into your account, and money going out. And it shouldn’t be too long before you can take advantage of their other facilities which could even mean a credit card or other form of loan.
Secured Credit Cards
If you live in the US you might decide to go for a secured credit card. These credit cards are quite common in America, but not in the UK.
Can Secured Credit Cards Help Rebuild Credit?
Secured credit cards are a good way of establishing or rebuilding your credit history. And, secured cards are usually easy to get, which is ideal for anyone with a bad credit or no credit history.
The idea is to use this type of card for a period of time, and by always making your payments on time this in turn helps to build a positive credit reference so that eventually you can get hold of an unsecured credit card.
Taking on Credit in Small Steps
The fact is that from time to time we all need a certain amount of credit. If at some time in the future you decide you want to buy a house with a mortgage now is the time to start building your credit up. If you are a member of a credit union you might be able to get a loan from them. Look for various ways of taking on credit, without overdoing it of course.
Credit Scores
As already mentioned, your concern should be to build up a good credit score. Credit scores don’t change overnight, because they are based on your history of borrowing and repaying. Lenders rely on credit scores to assess the likelihood of you repaying what you are loaned. Over time you can do a lot to strengthen your credit score, including making all your payments on time, contacting your lender if you do fall behind on payments so you can agree on a repayment schedule, keep spending under control and do not take on too much debt, close accounts you aren’t using, and one we’ll discuss further – open new accounts responsibly and ensure they are paid off on time to show lenders you are capable of managing credit.
The reason for closing old credit card accounts is that even if you can’t use them because the card is out of date they may still appear on your credit file as an available line of credit. This could be detrimental to you gaining further credit. So, make sure all old agreements are cancelled with your card company.
Also, if you find you have a higher credit limit on your card than you need then ask your lender to reduce it to the level you use, or likely to use in the foreseeable future. A limit of £3,000 is pointless if you only ever go up to £500 for instance.
Above all else, if you must miss a payment the last one you should miss is your mortgage payment. Missing a mortgage payment is a big ‘no-no’ as far as lenders are concerned. Miss a credit card or loan repayment and you will sometimes be forgiven, but do that with your mortgage and chances are a prospective lender won’t be so lenient, drastically reducing your chances of getting credit off them.
If you are having difficulties paying your mortgage talk to your lender and see if you can come to an arrangement with them, such as extending the term of your repayments, or switching to interest-only repayments.
Remember, a good credit score, in time, will sometimes help determine the rate of interest you will pay on certain loans and credit cards.
The five main factors to determine your credit score are:
* Payment History
* Amount owed
* Length of credit history
* New credit
* Types of credit in use
Experian use a credit score which goes from 0-999.
Very poor 0-560 Lenders consider as Very High Risk
Poor 561 – 720 Lenders consider as High Risk
Fair 721-880 Lenders consider as Moderate
Good 881 -960 Lenders consider as Low Risk
Excellent 961-999 Lenders consider as Very Low Risk
Clearly then the higher up the scale you go the better it is, and you improve your chances of getting credit, and getting it at a lower interest rate.
For example, you might decide to apply for a credit card, and there are two good reasons for doing so.
a) To sign another credit agreement, the details of which will appear on your credit file.
b) To use the card to borrow every month and then repay on time every month, which is all good when it shows up on your credit file.
Vanquis
There are several companies who will provide credit cards to those who have a poor credit record. One is called the Vanquis Credit Card.
To qualify you must be able to tick all the boxes:
* You haven’t applied for a Vanquis card in the last 6 months.
* You are able to verify your address (e.g. bank statements, utility bills).
* You are not in the midst of declaring bankruptcy.
* You are registered on the electoral role.
* You are 18 or over.
If you fulfill the above then you stand a good chance of getting one of their cards. But, be warned! The provider is taking on greater risks, and that comes at a price. You can find that interest rates are often over 30% APR, sometimes much higher, so make sure you leave no outstanding balance at the end of each month.
Capital One Credit Cards
Another card for those wishing to restore their credit is the Capital One card. Again though you should bear in mind the APR for outstanding balances is currently more than 30%. But, as your aim is to build up a good credit record you will want to pay off your balance every month anyway.
You are more likely to be accepted for one of Capital One’s credit cards if-
* You’re over 18
* You have some history of managing your credit even if you have had CCJs or defaults in the past
* You are on the electoral roll
But not if:
* You’ve never had credit in the UK before
* You have been declared bankrupt in the last 12 months
Aqua Credit Card
Another credit card is the aqua card. It offers no annual fee, a credit limit of up to £1,600 and no interest on purchases if paid in full. The aqua card might appeal to someone who is:
* Self employed and find it difficult to prove a regular income
* A homemaker
* Working part-time or on a low income
* At a new address or not on the electoral roll
* Recently moved to the UK
* Affected by previous poor credit, including County Court Judgments (CCJs)
Again, like other types of similar cards, the aqua credit card has an APR of over 30%, so it is essential to pay off any monthly outstanding balance!
Aqua credit card – underwritten and managed by SAV Credit Ltd and issued by Bank of Scotland plc.
The striking difference between credit cards for those with poor credit histories in the UK and those in the U.S. is that there are a number of card providers in the U.S. with low interest rates, but, they often charge annual fees, and/or security deposits.
The Orchard Bank credit card (part of HSBC), for example, comes with annual fees ranging from $39 to $59, depending on credit history, and APRs range from 14.9% to 19.9%, also based on your credit.
The Capital One Secured MasterCard has an annual fee of $29. The amount of available credit depends on how much you deposit as security. Their APR is currently 22.9%, which is still well below credit cards in the UK designed for people with poor credit histories.
Taking on Credit Through Loans
There are some loan companies who will also offer loans when other financial institutions won’t. These companies aim at people who are suffering with defaults, CCJs or arrears. Whatever your circumstances and even if you have a bad credit history, they can help you in taking on credit. Some will offer loans to both tenants and homeowners. Again though, expect to pay way over the odds in interest rates for these loans, having a poor credit history can prove expensive.
Having said that, if it means you can start to build up your credit and show a good record it means in time hopefully you will be able to get credit at more normal, lower interest rates. The key thing is to go slowly, do not apply for lots of types of credit all at once. If you get rejected and keep on trying remember that each time a company runs a credit check a note is made against your credit file. This makes you look desperate, and you are then even less likely to get past the application stage. If you are refused credit more than a couple of times leave it at least 6 months before attempting to get credit again, preferably longer.
Remember, a good credit score, in time, will sometimes help determine the rate of interest you will pay on certain loans and credit cards.
Don’t go overboard and have too many lines of credit. If you have a mortgage, and car loan, which are often the two biggest amounts of credit you will have, then keep the rest of the loans below double figures ideally. If you can consolidate several loans into one larger loan this could work in your favour.
Taking on credit is a serious matter, but if done right it can mean big savings over time.
