I graduated from university a few years ago and I was really useless with my money. I was given a credit card when I opened my student bank account, as well as some store cards, maxed them out and missed repayments.
I know my credit history is in a bit of a state now – my parents have had to act as a guarantor when I rented a flat, and I’ve only just been able to get a mobile phone contract in my name again.
I’ve paid off all of my debts, I’m working and earning decent money and I’ll never get into such trouble again. I want a credit card, but I’m worried that with a low credit score, I’ll get rejected, which will make things worse. What can I do?
Anonymous, via email.
Well done to you for getting back on your financial feet. Climbing your way out of debt is a marathon – it takes sacrifices and planning, so you’ve taken some really important steps in your financial journey.
The good news is that the negative information – the records of missed payments, defaults and even county court judgments – won’t stay on your credit report forever. Details of your late payments can be viewed for six years after they were settled. Searches and rejections of credit typically disappear after 12 months. So this dark cloud won’t hang over you forever.
Before we talk about applying for credit again, there are steps you can take to improve your credit health. Firstly, you should review your credit reports and make sure there are no errors that could be holding your score back. You can get your credit report for free from each of the three credit reference agencies – TransUnion, Equifax and Experian – and can ask them to investigate errors. Lenders and credit reference agencies have 28 days to respond to disputes.
Registering to vote by getting on the electoral roll can boost your credit score, while you may even be able to add the record of your monthly rent payments to your credit score by asking your landlord to report rental payments to firms like The Rental Exchange, CreditLadder or Canopy.
Experian has launched a new tool that allows you to share information about your banking habits and subscriptions – information which is not traditionally factored into your credit score – in order to increase your score. That means paying your council tax or even paying for Netflix and Amazon Prime could give your score a boost.
If you still want a credit card, your choice is likely to be limited to a particular set of cards designed for people with poor or ‘thin’ credit histories. These are known as ‘credit-builder’ cards, or sometimes ‘bad credit’ cards.
These cards have higher interest rates compared to the most competitive products in the market, to reflect the risk that a lender is taking in by providing credit to someone with a history of repayment problems. You can expect to find an APR of around 29%. They also have lower limits, so when you apply, don’t be surprised to find that the lender will initially only give you £250 to £500.
However, these cards can be used to demonstrate that you are a responsible borrower, can repay on time and stay within your credit limit.
Here’s the golden rule - avoid borrowing money on these credit cards. Purchases tend to be interest-free for 55 days, after which you’ll be charged a considerable amount of interest. So limit the use of these cards, and when you do use them, try to pay them off in full. If you don’t pay on time, you will lose any promotional offer, be hit with a fee and your provider will report your missed payment to the credit reference agencies, reversing any good work you might have done. Set up a direct debit to ensure that your minimum payments are met in advance of the credit card payment date.
When you apply, use an eligibility checker first. This will ask for some basic information and carry out a ‘soft search’ on your credit file, returning a list of cards and the probability of your application being successful. That would be a helpful guide to find a card that is likely to accept you.
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