Have you been refused credit? Find out how to build yourself a good credit history.

• What you need to know

• Find out why you may not have a credit history
• Six-step guide to building a good credit history
• Once you've created a credit history keep an eye on it with these agencies.

Establishing a credit history can be a nightmare for lots of people - you can't create a credit history without credit, and you can't get credit without a credit history! There aren’t any quick fixes and establishing a good credit history will take time - but don’t panic because there are things you can do.

What you need to know

There are three credit reference agencies - Experian, Equifax and Callcredit - who collect information to send to any lenders. They get this information from various places like the Electoral roll, court records and of course financial data from banks, building societies and other financial organisations. The information in a credit history includes personal information like name, date of birth, current and previous addresses, and current and previous employers. It also contains all the details of any accounts opened in your name - both closed and inactive - for six years from the last date of activity. Public records like County Court Judgements (CCJs) are also likely to appear on the report (again usually for about six years).

The sort of people who will want to look at your credit report are potential lenders, landlords and insurance companies.

Why do you need to build a credit history?

Without a credit history you will find it almost impossible to borrow money. Lenders need to know your credit history to see how much of a risk you will be. You never know when you might need a loan so it’s best to establish a history in case an emergency crops up. 

Reasons you may not have a credit history.

• You're a student and you don't have a regular income
• You have just moved to the UK
• You have just moved back to the UK after living abroad
• You have never had a credit card or personal loan

How to build your credit history

Step one: Register on the electoral roll

Some lenders will simply refuse applicants that aren't registered to vote. Contact the credit reference agencies and provide documents that confirm your identity and your address. If you have been linked to addresses with which you have no connection contact the companies who created the links and ask for the address link to be deleted.

Step two: Open a checking account

A checking account or savings account will show that you have money in the bank.  Lenders will see a bank account as a sign of financial stability because an active bank account will prove that you can manage money.

You don’t need a credit rating to open a checking account and although it doesn’t get reported to the credit reference people it’s still important when lenders are considering whether to give you a credit card or loan.

Step three: Get a credit card

Don't keep applying for credit cards when you are refused - this will only be worse for your record. Apply once for one of these cards then make sure you use it responsibly. Only spend what you can afford and pay at least the minimum required each month on time. You will probably only be able to get a card with a very high interest rate but as long as you only spend what you can afford you can avoid any problems. It’s so important to make payments on time - set up automatic payments or reminders on your computer so that you never miss a payment. After about a year you can try to switch to a regular credit card that has a lower interest rate.

• Apply for a prepaid credit card - you will not be refused on the grounds of your credit rating (or lack of credit history) because a prepaid card is not a credit card so you're not borrowing any money. Barclaycard has a Creditbuilder card which is ideal for people with no credit record. You have a starting credit limit of £100, £250 or £450 and the typical APR is 29.9% which is high but if you use it responsibly for a few months then you can get upgraded to one of their cards with a better interest rate and move on up from there. Another option is the Cashplus Creditbuilder pre-paid credit card. With this card you are charged a £4.95 fee each month but if you use it regularly for twelve months consecutively you can build up your credit score - just make sure you pay the fee every month.

Find out everything you need to know about prepaid credit cards here.

• Consider a Department Store Card - here at Moneymagpie we don’t normally recommend store cards because of the high interest rates. However, if you are trying to build a credit history they may actually be very helpful. Make sure they report to the credit reference companies and if you are approved for a store card be really disciplined and use it sensibly. Pay it off each month on time and you can start establishing a good credit history.

• Get a secured credit card - a secured credit card is when an asset is linked to the account that the lender can then take if you fail to meet the payments, for example, a mortgage is secured against your house. You secure the credit card with a deposit - if you fail to make the credit card payments the bank will take the deposit. Again you should check that the secured credit card reports to the three credit reference companies. After six months to a year you can apply for a normal credit card.

Step four: Use someone else's good credit history.

If you don't qualify for credit on your own you can get someone with an established credit history – usually a family member - to act as a co-signer who promises to pay your debts if you don't. This is one of the fastest ways to establish a credit history. You can either be added to a credit card as a joint account holder or get someone to act as co-signer on an application for a loan. This will make it much more likely that you will qualify for loans. The loan will then show up on your credit report and as long as you pay it off on time it will improve your score. Make sure that whoever acts as co-signer has a good credit score. They can check it here. If they don’t try someone else because their poor credit rating will reflect on you.

Step five: Get a small loan.

Once you’ve had a credit card for about a year – and have been paying off the bills every month on time - you can try asking the bank for a small personal loan. Once again you need to be able to pay this off in instalments on time and this will help you to build up a good credit record.

Write to your local council and check that you’re on the electoral roll. If you aren’t eligible to be on the roll just contact the credit agencies and give them proof of address.

Step six: Keep an eye on your credit rating.

Register with one of the credit report agencies like Experian, Equifax and Callcredit. For just £2 you can get a paper copy of your credit report in the post. However, it is more helpful now to keep a constant eye on your credit report for a couple of reasons: you can tell immediately if someone is using your details fraudulently and you can find out quickly when your credit history is strong enough to get cheap loans and cards. Creditexpert (run by Experian) costs £6.99 a month, but you can get the first 30 days free with no obligation to remain a subscriber. Similarly, Equifax offer a free 30-day trial with their Credit Watch Gold report. Checkmyfile offers unlimited access to your credit files for just under £5 a month - potentially the cheapest way to monitor your credit file in the long run.

Check your credit report with these agencies:

• Equifax
• Experian
• Callcredit
• Checkmyfile

Related articles

• Want to know more? Read our article Big Brother really is watching - your credit file.
• Can't get a loan? Get some help with our article on the alternatives.
• Build up your credit history with prepaid cards. Read all about it here.
• Need to clean up your credit record? Learn how to here.
• Once you've cleaned it up make sure you get the best credit cards. Find out about credit cards with rewards plus the best 0% cards for both balance transfers and spending.