Building a good credit history is probably one of the most important financial decisions you’ll ever make. It’s therefore important to thoroughly understand what it is, how to build it, what tools you should use, and the effects it can have on your everyday life.
What is it?
So, what is credit? Credit is the ability to borrow money (from authorised sources) in order to pay for good or services, with the agreement that you will pay it back within an agreed timeframe.
As society becomes increasingly digitised we are relying on credit more and more to access key financial services and products that enable us to improve our quality of life.
Credit reliability, on the other hand, is a sort of report card that the bank issues to evaluate the financial conduct of each borrower. It is an indicative value that represents the ability that a subject has in meeting the commitment made during a loan. It consists of assessments that concern various elements:
- The degree of debt of the person applying for the loan
- The economic capacity of the applicant
- Monthly revenue and the relationship between income and debt
- The reputability of the payer or punctuality in repaying the installments
Before deciding whether to grant a loan, the bank will collect all the information relating to the applicant from the "Risk Center", a sort of confidential database, which also includes any irregularities committed by the applicant during his credit history.
Reliability is calculated starting from a score, the credit score, which takes into account both the elements of merit, such as punctuality in payments, and those of demerit, such as insolvencies or delays.
What effect can it have on my life?
Though it may seem incredible, your credit history can have a huge impact on your life, and the types of services you are able to access.
It can affect where you live, whether you are a renter or a homeowner. Landlords run or request a credit check on all new tenants, and may refuse to rent to anyone with a poor credit history. Similarly, in order to successfully apply for a mortgage you must have a clean credit history with a good record to responsible borrowing.
Many utility companies won’t let you open accounts with them if you have a poor credit rating, and it can be difficult to find affordable car insurance for those with poor credit history too.
Having no credit history won’t help you either, as many companies require some sort of indicator as to your reliability as a borrower, and will be just as unlikely to enter into a contract with you if you have no history of credit at all. In short, life can become difficult and expensive if you do not build a stable, clean credit history.
How to build it
When you are working on building your credit, experts usually advise you start small. A credit card is usually the easiest place to start building your credit. You can look online for good credit card deals, or apply through your bank.
It can be difficult to open your first line of credit, as many lenders are reluctant to lend when they cannot accurately calculate risk. However, in cases such as these you can look into the possibility of joint or secured credit cards as your first option.
How to use it
Once you have access to a line of credit you should then concentrate on building up a solid history. If you have a credit card, for example, then use it on a regular basis to make small manageable purchases. Always make sure you pay off your credit card statement in full each month, and never miss a payment.
Over time as your credit increases, and you prove to be a reliable borrower, you may be contacted by your bank informing you that your credit limit has been increased, or that you are now eligible to take out a loan. You may also find that you receive more favourable interest rates for credit cards and loans, the stronger your credit becomes.
Always remember that experts advise against borrowing more than you can afford to pay back, as this can lead to incurring debt, which will not only harm your credit history, but may also lead to other financial difficulties. Similarly, it is advised that, despite having access to lines of credit, you always attempt to live within your means. Remember that credit is a useful financial tool you can use to help you improve your life; it should not be viewed as a second or supplement income.
Building credit, as well as savings and investments, is a part of having good financial good health. It also helps you develop strong financial habits that will help you in the future