How to build credit history

Having a thin credit file doesn’t automatically disqualify you from applying for a personal loan.

In this guide, we explain what a thin credit file means and how you can build your credit history to improve your chances of being accepted for a loan…

What is a ‘thin credit file’?

A ‘thin credit file’ refers to a person’s credit report if they have limited experience of managing debt.

Those with a thin credit file are typically young people, people who are fairly new to the country, those who are separated and had little credit in their own name previously, or people who simply have not used a lot of financial services in the past.

How will a thin credit file impact my loan application?

Having limited credit history won’t automatically discount you from being accepted for a loan. But it could make it harder or more expensive to borrow money. Let’s explain why…

When assessing a loan application, lenders like us will take into account credit risk and affordability.

Affordability essentially determines whether it’s likely you’ll be able to afford the loan comfortably. We’ll look at your monthly income and credit commitments to determine whether you have enough income leftover for other essential purchases and day-to-day costs.

Each lender will also calculate a credit score for the application, which is determined using the information on your credit report (also known as a credit file). Your credit report gives the lender a glimpse into how you’ve managed debt in the past. We want to understand more about your past credit behaviour, your financial stability, recent behaviour and your overall debt burden.

If you’ve got a thin credit file, we won’t be able to assess your track record of making repayments or handling debt. This makes it harder to make an informed decision.

I have no credit history and need a loan – what should I do?

First things first - check your credit report

It’s worth knowing exactly what’s on your credit report to make sure you can report any errors or inaccuracies. Having sight of your file will help you work out what is in your report, giving you a better idea of how to build your credit history.

It’s free of charge to request your credit file from any or all of the three main credit reference agencies. Simply apply online through their partner websites: MoneySavingExpert’s Credit Club (Experian), ClearScore (Equifax) and Credit Karma (TransUnion). You can also contact the credit reference agencies directly to request a paper copy.

Grant us permission to use open banking

If your loan application is referred, we may need to look at copies of your bank statements or use open banking to gather additional information.

At Novuna Personal Finance, we have a three-tier affordability check to help us get a better understanding of your financial situation and how you handle your money. It allows us to verify your income and assess whether you’re in a financial position to take out a personal loan.

Open banking in particular can be beneficial if you have a thin credit file as it gives us a better overview of your income and expenditure even if you don’t have a track record of paying back debt specifically. You could improve your chances of being accepted for a loan by giving lenders the additional information they request.

You can find out more about open banking and its benefits here.

Be realistic about the APR you expect to be offered

A loan that advertises a very low APR may be more competitive. Remember that providers must give their advertised rate to at least 51% of all paid out customers – which means that 49% of customers may be offered higher APRs.

If you don’t have a strong credit history, it’s unlikely you’ll be in the top 51% of accepted applicants so don’t be disheartened if you aren’t offered the very best rate until you’ve built up your credit history.

You may be more likely to be accepted for a credit card or higher APR loans. While you’ll pay higher interest charges on these products, this could be a good way to access credit if you need it while also building your credit history.

Only apply for a loan if the repayments are sustainable

Use a loan calculator to work out how much your monthly repayments could be on the money you wish to borrow. If you think there’s a chance your repayments could become unaffordable, reduce the loan amount or elongate the loan term to bring the monthly repayments down (though be aware that you will pay more interest in total if you do this).

Taking out a loan you can’t comfortably afford heightens your risk of missing a payment or making late payments, which could have a long-lasting impact on your ability to borrow in the future.

Tips to build credit history

If you’re looking for the best ways to build your credit history, here are our top tips…

Don’t worry too much - your credit experience will likely improve naturally over time

Your credit history might naturally build as you pay utility bills, take out a mobile phone contract, use a loan to pay for a car or get a mortgage. These are all things that don’t happen overnight so don’t worry too much if you haven’t got a particularly varied credit mix just yet.

Open a bank account

Opening a bank account is a good place to start when you’re building your credit history. It can help you manage your bills (such as water, electricity or council tax bills) and showcase financial responsibility.

Our top tip is to set up direct debit payments for any regular bills to make sure you don’t miss paying them by accident. If the payments are automatically taken from your account, there’s less chance your bills will go unpaid.

Register on the electoral roll

This is a great way to start to improve your credit score without taking out any credit by allowing lenders to confirm your identity.

If you are in short-term accommodation (for example, if you are a student), it can be good idea to remain on electoral roll at your family home and register credit accounts there also if possible. This ensures your credit information is in one place.

Research rent-reporting services

Monthly rent payments aren’t automatically reported to credit reference agencies, but you can ensure rent payments are added to your credit report by using a rent-reporting service such as CreditLadder. Recording your regular rent payments on your report could be helpful if you have a thin credit file, as it demonstrates responsible money management.

Of course, reporting your rent payments will only have a positive impact on your credit score if you make your payments on time every month. Missing a payment or making a late payment could have a negative impact on your score.

Access credit responsibly… and only when you need to

As we mentioned earlier, you should only ever borrow money as you need and can afford. It’s never a good idea to borrow money purely to build your credit history. Instead, wait until you do need to take out credit. For example, a mobile phone contract in your own name or a current account with an overdraft.

Consider credit building cards carefully

There are products available built specifically for people who’ve never had credit before. Credit builder cards, for example, give you experience managing revolving credit. You can borrow up to the credit limit (though it’s advised you don’t use all of the credit available every month) and pay back what you owe each month. Keeping up to your repayments can be a good way to improve your credit score and demonstrate you can handle debt responsibly.

Credit builder cards often have a low credit limit but you must still only ever borrow what you can comfortably afford to repay. If there’s a risk you will overspend or borrow what you can’t afford, this might not be the right product for you.

They also have high APRs. You must be able to pay the balance off every month or you could end up paying a lot of interest. The good news, though, is interest charges can be avoided if you pay off your balance in full each month.

If you do get credit, ensure you make your repayments on time

This is obvious, but if you do choose to take out any form of credit, ensure you don’t miss or make any late payments. This information will be recorded on your credit file for six years which could affect your ability to borrow money for many years to come. It’s far better to have limited credit experience than a history of mishandling debt.

Access debt advice if you need it

Managing debt for the first time can feel overwhelming. But it’s important to remember that your early credit behaviour could have an impact on your ability to access credit in the future.

If, for whatever reason, you do find yourself in financial difficulty, it’s important to speak to your lender as soon as possible. Explain your situation fully and honestly, so they can help to find a resolution that works for you.

You could also engage with the charity StepChange, to access free advice on managing your debt.

Avoid payday loans

Payday loans will not help build your credit history. In fact, some lenders might not consider applications with recent payday loans – even if you do pay it back in full and on time.

Don’t apply for several loans at once

When you apply for a personal loan, a hard credit search will be recorded on your credit file. While other lenders can’t see whether you were accepted for the loan or not, or what APR you were offered, they can see the number of hard searches that have been made.

Several hard searches within a short space of time can be a red flag to lenders as it suggests you’re overly reliant on credit. So try not to apply for lots of loans all at once.

Of course, if you do apply for a loan and get an unexpectedly high rate, it’s understandable you’ll want to apply elsewhere to see if you can get a better deal. However, if you are consistently being declined or offered high rates it’s likely time to stop applying as this could start to further decrease your credit score. In this case, wait a few months before applying again and work on improving your credit score in the meantime.

How long does it take to build up credit history?

It can take from a couple of months to a few years for your credit history to build. At a minimum, it could take six weeks for any change to be recorded on your credit report. This is because lenders only provide information to credit reference agencies every month, and it takes a couple of weeks for this information to appear on your file.

If you have limited credit history but you’re actively trying to build it up, expect to wait around six months before there is any noticeable change in your credit score.

There is no finishing line, however. Throughout your lifetime your credit history – and credit score – will improve and potentially worsen depending on your financial activity.