5 Rules for Using a Credit Card to Build Credit

by from money.co.uk

Using a credit card to build your credit rating is an easy way to increase your chance of being accepted for the best money deals. Follow these rules to make yours as good as it can be.

Lady Choosing Between Bank Cards

It’s a fact: your credit rating has a big say on your ability to borrow.

Lenders use it to judge whether they should lend to you, so if yours isn’t up to scratch you could struggle to get the best deals.

Whether you’re new to credit or have had credit problems in the past, using a credit building credit card effectively is one of the best ways to boost or build your credit rating.

Following these 5 rules will help you work your way to a far stronger credit rating in the future:

1) Check your credit report before you do anything else

The best way to start building a good credit history is by checking your credit rating.

This will help you see what factors are influencing it, identify issues that need correcting and show you what lenders see when they’re checking you out.

Lenders will look at a range of factors when deciding whether to accept you as a customer, including:

  • Your outstanding borrowing
  • How often you’ve applied for credit and whether it looks like you were turned down
  • Your repayment history
  • Your address history
  • Any financial associations you have with others
  • Whether you have outstanding issues like CCJs or bankruptcy (these stay on your file for up to six years)

There are three main credit reference agencies which you can turn to get your report: Experian, Equifax and Callcredit. Each one holds slightly different information about you, so it’s a good idea to check with one and then, if there are any clear discrepancies, check with the others.

When you have access to your report you should make sure that all the information is accurate and up to date, as if it’s not you could get refused credit for no good reason. If there is incorrect information, you should contact the credit agency to let it know and ask them to investigate.

You can find out more about getting and checking your credit report by reading our guides How to get a free credit report, How to improve your credit rating and Refused credit – what now?

What’s the cost?

It costs £2 to get a statutory credit report from each credit reference agency.

Experian and Equifax also provide free 30 day trials that give you unlimited access to your credit report – but you will be charged a fee if you don’t cancel before the free trial is up.

Callcredit offers a free credit report, via Noodle, although this is used by fewer lenders. Callcredit charges a one-off fee, but again if you cancel soon after joining and checking your report, you won’t have to pay regular subscription fees.

2) Get a credit building credit card that suits your circumstances

While it’s true that your options are more limited if you haven’t managed credit well in the past or are completely new to credit, there are still doors open to you.

A number of credit card companies cater for people with limited or poor credit ratings, and some will even consider you if you have past CCJs or have previously been declared bankrupt.

Although poor credit cards will usually charge a high rate of interest on borrowing, the good news is that you can use them to rebuild your credit history without paying any interest.

How to find the best credit building credit card

To find the best credit building credit card for your situation, you should compare credit building cards and check the conditions carefully, so that you can make sure you pick the right one.

Look for the option with the cheapest rate of interest and eligibility criteria that you satisfy.

It’s crucial that you make a thorough credit card comparison, as making applications willy-nilly could hurt your rating further if it leads to you being declined.

Choose one card and complete the application form carefully, accurately and honestly to maximise your chance of getting accepted.

Don’t apply for a lot of cards at the same time because this can actually harm your chances of being accepted. Each lender will check your credit history with one or more reference agencies. This will leave a footprint that other lenders can see.

Making a number of applications in a short amount of time will leave a number of footprints, which makes you look desperate for credit, so lenders will see you as too risky to lend to.

If there are a number of footprints on your report, but no open balances for companies that created them, it will suggest to lenders that you were declined a number of times and make them hesitant to offer you credit.

3) Spend on your card every month (but don’t go crazy)

There’s little point having a credit card to build credit if you don’t use it.

Once you’ve got one, you need to use it to make planned purchases and then pay the balance off in full when you get your monthly statement.

It’s important that you don’t go over the credit limit you’ve been set, as this can do damage in a number of ways.

For a start you’ll have to pay over-the-limit fees, but more importantly it’ll also hurt your credit rating and indicate to your current lender and future lenders that you can’t manage credit properly.

Even if you have thousands of pounds in credit, it’s best not to use a massive amount of it. Only use what you can afford to pay back.

Remember, credit cards aren’t debit cards, and so shouldn’t be used to withdraw cash from an ATM. Doing so will often see you get charged a significant amount of interest and fees, so there’s really no point in taking money out that way.

4) Set up a direct debit for at least the minimum

When you’ve got the best credit building credit card for you and started using it, you need to make sure you pay it off on time and without fail!

The easiest and best way to do this is to set up a direct debit (DD) payment to automatically pay your bill each month using money from your current bank account.

Paying off your credit card bill on time is crucial, as missing a payment will indicate that you aren’t able to manage credit so make sure you have enough cash in your account to cover this!

If you don’t have an ordinary current account and have had past credit issues, you may want to consider a basic bank account which has a direct debit option so that you can still make payments and/or set up standing orders.

You can choose to set up the direct debit to pay either the minimum amount or full balance – it’s up to you, as long as you make sure you pay it. That leads us nicely on to rule five…

5) Pay your credit card off in full!

Even if you set your direct debit to cover the minimum payment, you still need to pay off the whole balance each month by your statement due date.

This is the only way to avoid paying interest and stop your debts spiralling, it’ll also help to show you’re a sensible borrower that can manage your credit well. You should be able to pay the extra via your online credit card account, by phone or by bank transfer – details should be on the back of your credit card statement.

After about a year of spending on your card and making repayments on time and in full, your credit rating should be in a much stronger position.

If you stick to it, it doesn’t take forever to build up your credit rating. Conversely, it doesn’t take a lot to do damage – so it’s best to keep up the good work and keep on paying on time!

Worried about getting accepted? Get a prepaid card

If you find you’re not eligible for a credit card because you have an undischarged bankruptcy, a poor credit history or you don’t trust yourself with a credit card, you do have another option: a prepaid credit building card.

There is only one company that currently offer these cards and a monthly charge for using them, but they can help you improve your credit history as long as you pay the monthly fee on time and in full over the course of a year,

If you get one of these cards it’s absolutely crucial that you make your payments on time as if you don’t, your future options could be extremely limited.

Using cards sensibly and following the rules for building credit will help you boost your rating considerably

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