No Credit History
Having no credit history is sometimes just as much of a problem as having a bad credit history. While this may sound a bit absurd, and actually it is pretty backwards, getting a loan for anything when you have no credit history can be challenging. In some cases, it might not happen at all. The reason this is counter intuitive is that someone who has worked and paid with cash instead of using credit, will not have any real history. This means that if you were a smart saver, with a great salary, you could have saved up enough to pay cash for your home, but still not qualify for a loan to make home repairs because of not having a credit history.
The No Credit History Scenario
If that scenario seems a little crazy, it’s actually not. Think about someone who graduates with a degree that’s in demand, and lands a great job paying something on the order of £80,000 a year. This is someone who could easily be investing £20,000 a year into the markets, and earning at least a 5% return on that investment every year. In just ten short years they’d have saved enough to pay cash for a nice home. Making that cash payment would save them at least the price of their home in terms of interest, so it’s an excellent investment. This is especially true, as the value of their home will increase year after year.
However, suppose that ten years after purchasing their home, they needed to make major repairs. At that point they’d be around 40 years old, and wouldn’t want to disturb the funds they’d been investing towards retirement. They might decide that their significant investment portfolio, savings and income strength would easily qualify them for a loan – particularly as they’d be using their home, which would be a 100% owned asset. Unfortunately, if they had no history with the credit reporting agencies, most lenders would turn them down. Those that would agree to loan money would likely charge very high interest rates.
Four Steps to make sure you always have a great credit history:
- Get Three Credit Cards: While it may seem illogical, credit cards are the gold standard by which all other loans are typically judged. This is because they are something of a test. It’s easy to be irresponsible with credit cards – so those who are responsible are considered to have ‘passed’ the credit test. When you do that, high-line cards like American Express and others will offer you huge credit lines – in some cases up to £20,000 or more. The catch being that you need to pay off your card every month in full.
- Pay Card Balances In Full: It should be no surprise after reading the above details on cards that paying off your balance in full every month is something of a ‘golden ticket’ in terms of looking good to the credit reporting agencies. The way you do that is easy. Just save up a month of your full expenses, and then use your credit card to pay everything that doesn’t involve any immediate interest fees. We mention immediate interest fees because some transactions are treated like cash and start accruing interest from the moment you make the purchase. Otherwise, anything else that is traditional credit is fine to charge. Also, if you have a card that gives you cash back, then your purchases, for which you are already keeping money in an interest bearing account of at least 2pc, will get you another 1pc cash back. Sometimes even more. That’s a significant increase to the interest your savings would otherwise be accruing.
- Check Your Credit Report: You can check your credit reports for free, or you can pay just £2 per check with each of the agencies as documented here. Obviously if you have enough wealth that you’re not overly concerned with needing credit, you’ll probably not be the type to game the system to get free reports or waste money paying absurdly high yearly fees. However, you will still want to check at least once a year. Some people just check one agency every four months, while others check all three every six months. More often than not this is just to be sure no one is using their information fraudulently or otherwise incorrectly reporting details on their credit report. However, managed properly it works out to anywhere from £6 to £12 per year, which is much less than the £300 or so it would otherwise cost each year to check all of your reports through the credit reporting agency monthly fee services.
- Build Relationships With Banks: This is a very important consideration, as the bank you keep your wealth with will in many cases be more willing to extend you credit than a bank where you are a stranger. In fact, even though credit reports are the gold standard for receiving loans, having enough money on deposit in a bank will mean that the bank directors and managers will know who you are. You’ll get special treatment, and the threat of them losing your invested wealth can motivate them to reconsider whether to loan you money or not. Obviously having the credit cards we mentioned at the beginning of this piece will be your ace in the hole, because that will also have built up a solid credit history for you.
No credit history can be a hindrance and can prevent you from getting finance
While there is no sure fire way to guarantee you’ll always have access to finances when you need them, even if you do have great credit, making sure you have at least some form of credit history is a start in the right direction. You may need to jump through some unpleasant hoops, such as secured cards or other unsavoury financial steps to get started, but once you’re off you’ll be able to quickly and easily build up your credit so that you’ve at least got that in your favour when applying for a loan. If you have suffered from having no credit history then let us know what problems you had in the comment box below.