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People in these situations may consider getting a loan, or a credit building credit card as it could improve their credit rating as they can demonstrate their ability to be responsible and pay things back on time. However, there is a lot of advice about using credit building techniques as a way to build one’s credit score, but this may make things worse. There are other things to potentially consider before going down this route.
On The Money to the Masses podcast, Laura Mossman gave listeners tips on the potential drawbacks of these methods, and other ways to consider building a person’s credit score.
She said: “It is never a good idea to borrow money that you don’t need to borrow or if there isn’t a specific purpose for borrowing.
“By taking out a loan you’re using up some of your credit quota so when other lenders for example a mortgage lender is assessing the affordability of a future product you take out, they going to be looking at any outstanding loans and the payments that you have to make.
“So, you can end up in advertently limiting the amount that you can go on to borrow for say, a mortgage or remortgage or even something like car finance may be put slightly at risk by having this existing loan in place.”
Additionally, Ms Mossman discussed the setbacks of credit building techniques for people with existing poor ratings.
A person may have a poor rating due to missed repayments or defaulting on any loans.
She continued: “Defaulting on a loan could dramatically affect your life in the future.
“It may stop you from getting a mortgage, you may not be able to secure car finance and you can even go so far as limiting the current accounts that you could potentially open in the future.
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“So, these things all worth bearing in mind before taking that step to take out a loan simply to improve your credit rating.”
When using credit builder credit cards, people may end up paying higher rates to take these products out.
This could make it even harder to make these repayments.
There are other ways to build a person’s credit score without taking these risks to make one a more attractive proposition for lenders in the future.
Ms Mossman added: “The first step is to check your credit file with the main credit reference agencies so Experian, Equifax and TransUnion.
“By doing that you can make sure that there aren’t any mistakes on those files, to correct those, to check for example on a CCJ that the details around that are correct if it’s been satisfied that the date is correct.
“Also just making sure that everything is accurate in terms of your address, your date of birth and any other information like that.”
Another step mentioned was being on the electoral roll, which will help to boost a person’s credit score.
Additionally, Ms Mossman gave recommendations on services that are designed to improve one’s credit rating such as Lockbox and Experian boost
She said: “There is lockbox .. and Experian boost. Experian Boost can help you as the name suggests boost your credit score specifically with Experian.
“It looks at things like whether you have Netflix or Amazon Prime, those kind of subscription services.
“It also uses open banking to see what your spending habits are.
“Things like paying your council tax or paying into savings or investments will count in your favour and you will immediately be awarded with a higher credit score if you meet certain qualifications, and that service is completely free.”
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