What is credit?

As you start earning and managing your own money, one milestone you’re likely to come across is credit.

‘Credit’ is when an organisation or person (known as a ‘lender’) gives you money, goods or services up front, and you pay later according to agreed terms. Many lenders add a charge called ‘interest’ to what you repay. Types of credit include:

  • Mobile phone contracts
  • Credit cards
  • Loans
  • Mortgages
  • Store cards
  • Mail order accounts
  • Some utility accounts such as energy, water and broadband
What is credit?

Your credit report

Once you sign a credit agreement (like a mobile phone contract or a bank account), you are making a commitment to repay the money. Most lenders share information about the credit they give people through credit reference agencies like Experian. The agencies use this information to create your credit report and make this available, to any new lender you apply to. Because of this, if you don’t repay money you owe according to the terms of the agreement, it could affect how a lender will view you in the future. Remember, if it’s just your name on the bill, even if you split the cost with others in a shared house, if you fall behind with a payment, you alone will be liable for the debt. One exception to this, however, is council tax, where the occupants of the house may be jointly liable, even if the bill is in one person’s name.

Your credit report

Your credit rating

Your ‘credit rating’ is basically your reputation as a borrower expressed as a simple number (such as 800 out of 999) that indicates the likelihood that you will repay what you owe and, therefore, the risk that a company would take if they lent to you. Lenders look at lots of information about you before they decide to give you credit. This information includes:

  • Whether you’ve borrowed before
  • How you have managed any credit you’ve taken out in the past
  • What credit you have right now and how you are managing it
  • The information in your application form, such as job, income and other personal details
  • Whether you are on the electoral roll
  • Any information they already know about you if you’re an existing customer
Your credit rating

How does my credit report affect me?

If you're over 18 and have ever taken out credit, a credit reference agency like Experian is likely to hold a credit report on you. Think of it as your financial CV, a record of how you’ve managed money you’ve borrowed over the past six years.

The more positive your credit report is, the more likely a lender will see you as a responsible borrower. That makes it more likely you will be accepted for credit and more likely you’ll qualify for better terms like cheaper interest rates, which could save you money.

How does my credit report affect me?

Building up a picture

When you start to manage your money and apply for credit, lenders will look at your credit report to check they can trust you to repay them as agreed on time.

For some young people, taking out credit can be a challenge at first, as they have no track record of borrowing money in the past, so lenders don’t have any evidence they can trust you. However, there are a number of things you can do to build up some history to show lenders you can be trusted to pay back money.

  • Get a bank account – these are included on credit reports and will help you begin building a credit history.
  • Switch utility bills in to your name – remember that if the bill isn’t paid on time and in full, you are liable, even if the bills are split with others.
  • If your parents have been paying your phone bill and you can afford to pay it yourself now, it will appear on your credit report if it’s switched to your name – which, as long as it’s managed properly, can help boost your credit rating.
  • If you have already taken out credit, always try to stay within your approved limits and never miss a payment. It’s often a good idea to set up direct debits to pay regular bills to avoid missing payments. A missed payment stays on your credit report for at least six years.
  • If you’re struggling to get credit, there are some credit builder cards that have been designed for people with little credit history. Consider using a card like this for small purchases and pay what you owe each month to show you can manage it well.
Building up a picture

Think before you borrow

Lenders are often keen to build relationships with new customers, and may use special offers to attract your attention.

While these can be useful, try to focus on getting what you need at the lowest cost. With a bank account, for example, an interest-free overdraft may be more valuable than online vouchers.

If you do get a bank account with an interest-free overdraft, remember there is no such thing as ‘free money’ and you will have to pay it back eventually. Try to use an overdraft as a buffer - an overdraft limit is not a target!

Having some well-managed credit accounts will make your credit report look healthy – but too many accounts with high levels of borrowing could discourage lenders.

Think before you borrow

Don’t forget to budget

It’s a balancing act – making sure you have more money coming in than going out will help keep your finances in shape.

If you want to reduce your outgoings, write down all your income and spending for the last three months and consider what you could do without – can visits to restaurants or nights out on the town be cut down?

Everyone needs a treat every now and then, just make sure you can cover the costs and pay back whatever you owe.

Don't forget to budget

Information about other people

Your credit rating can be influenced by other people in certain cases. This is called “financial association” and happens when you take out or apply for a credit agreement with someone else.

If you and your housemates sign a joint credit agreement, for example with a bank, this will create a financial association between you and them on your credit reports. Their names will appear on your credit report and a lender might take their credit report information into account if you apply for credit.

Remember also that if someone guarantees your credit agreement, like your parents, if you fall behind on payments this could also negatively impact their credit rating because you are financially linked.

Information about other people

If you’re refused credit

If a lender says no to your application, try to find out why as soon as possible.

This will help you understand if there are areas for improvement in your credit report, or if there are other factors that influenced the lender’s decision. This can help you strengthen your credit report and, therefore, improve your chances of being approved for credit next time.

Credit reference agencies, such as Experian, will help you to check that your credit report is up to date and accurate, and will help investigate any points you believe may be incorrect.

If you're refused credit

Help is at hand

If your circumstances change suddenly – say your income drops or you become ill - let lenders know as soon as possible. They may be able to help – such as reducing repayments for a period. It’s important not to ignore the issue and hope it goes away. The longer you don’t address the issue, the more it could damage your credit rating in the future.

There are also free, professional, independent bodies that can help you with debt problems, including:

  • Citizens Advice
  • StepChange Debt Charity
  • National Debtline
  • Payplan
Help is at hand

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