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I still live at home and thus I don't pay any rent or bills directly. I give a small chunk to my parents but this is somewhat irregular.

I am employed, so a lot of my income goes straight into pension, savings etc...

My monthly expenses are only about £400.

Apart from using a credit card on everyday purchases and promptly paying off the outstanding balance, what other activities will contribute positively to my credit score?

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    @n00b - FICO is a US entity. This is a UK question. There is a lot of overlap when discussing the general principles, but specific advice and websites should reflect that locale. – NL - Apologize to Monica Feb 28 '17 at 16:14
  • In the US, neither rent nor bills improve your credit but if you get sent to a collections agency for late payments then your credit score goes down; 'Merica! I believe that getting a 2-year cell phone contract builds credit because it's actually a loan but they don't call it that; how else do you think that they can give away phones for "Zero down!". If your parents are willing and the timing is in your favor then you could in theory co-sign for a small car loan. When I was 18, I was sent a credit card offer with a $300 limit so I applied for it and paid off the bill in full every month. – MonkeyZeus Feb 28 '17 at 16:31
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    From the age of 18, I have had a mobile phone on contract continuously. I was unaware of credit scores or anything like that at the time but fortunately having an old, long-standing account like that ended up benefiting my score quite a lot in the long run. I didn't get a credit card until I was 26 but I still always had a good score. – Luke Feb 28 '17 at 17:15
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    You could always use your credit card / small loan to pay for some significant expense that someone else (for example your parents) have to pay, where the person is 100% trustworthy & will immediately pay you back the money. Maybe your mum is about to spend £5-10k on a car, using cash she has in the bank - you could pay on your card & quickly pay it off (before incurring interest). However, DO NOT do this with anyone you cannot trust ABSOLUTELY, it's a recipe for disaster. – John U Mar 1 '17 at 13:00
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    @TheMathemagician I don't think taking out a loan that I do not need just to improve my credit score is a good idea. Why incurr debt and lose money when, as others in this post have suggested, there are alternatives available. – turnip Mar 1 '17 at 13:15

10 Answers 10

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For those who are looking to improve credit for the sake of being able to obtain future credit on better terms, I think a rewards credit card is the best way to do that.

I recommend that you only use as many cards as you need to gain the best rewards. I have one card that gives 6% back on grocery purchases, and I have another card that gives 4% back on [petrol] and 2% back on dining out. Both of those cards give only 1% back on all other purchases, so I use a third card that gives 1.5% back across the board for my other purchases. I pay all of the cards in full each month. If there was a card that didn't give me an advantage in making my purchases, I wouldn't own it. I'm generally frugal, so I know that there is no psychological disadvantage to paying with a card. You have to consider your own spending discipline when deciding whether paying with cards is an advantage for you.

In the end, you should only use debt when you can pay low interest rates (or as in the case of the cards above, no interest at all). In the case of the low interest debt, it should be allowing you to make an investment that will pay you more by having it sooner than the cost of interest. You might need a car to get to work, but you probably don't need a new car. Borrow as little as you can and repay your loans as quickly as you can. Debt can be a tool for your advantage, but only if used wisely. Don't be lured in by the temptation of something new and shiny now that you can pay for later.

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    TL;DR. Get a credit card and start building credit. I think debit cards also have some sort of "use as credit card" feature but I have no experience with debit cards. – MonkeyZeus Feb 28 '17 at 16:26
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    I have taken this one step further and set up auto-payment for my credit card bills (known as Electronic Clearing Service or ECS, here in India). That forces me to constantly monitor my credit card usage, and ensuring that my spends do not exceed what I can pay in a month. A credit card also buys me some time to make arrangements to pay for an unplanned expenses. There's also the interest free credit and reward points/cashback. Using credit cards for 9 years now, paid ZERO interest so far. :-) – Masked Man Feb 28 '17 at 16:39
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    @MonkeyZeus debit cards will not give you the reporting for credit building. – NL - Apologize to Monica Feb 28 '17 at 17:13
  • @NathanL I've done some research and have arrived at that same conclusion. Like I said, I have zero debit card experience because I do not wish to have my most liquid assets frozen in the event of an issue so whenever I hear "use debit as credit" I would die a little inside because it makes no sense but is so widely used that I've become numb. For anyone else reading this, CREDIT CARDS BUILD CREDIT, not debit cards. – MonkeyZeus Feb 28 '17 at 19:43
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    FYI, there's at least one card in the US that gives 2% on everything. Kind of pointless to have anything else for 2% or less. – Mehrdad Mar 1 '17 at 10:24
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So you work, and give a small irregular amount to you parents. You live with very low expenses. Assuming you make a bit below the average salary in the UK, you should be able to save around £1000. If you found a part time job could you save double? I bet you could.

So why do you need credit? Why do you need a credit score?

Having poor or no credit can be remedied by having a large down payment. Essentially the bank asks, if this person could afford the payment of this loan why have they not been saving the money? You could save the money and either buy the thing(s) you desire with cash (the smartest), or put 50% down. Putting 50% or more down turns you into a good credit risk despite having no credit history.

In case you missed it: why not just save the money and buy it for cash? Why have compounding interest working against you? Why do you want to work for the bank?

Making the interest payments on loans in order to build a credit score is just silly. It is an instance of a "tail wagging the dog".

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    I have lived both lives. Borrowing to buy everything, and now cash only. Living a life free of loans will help you build wealth quicker than you can imagine. The "having a good credit score" mantra is a trap and a lie that leads to relative poverty. – Pete B. Feb 28 '17 at 13:00
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    What about the effect credit score has on your car insurance rates? (maybe it's different outside the U.S.?) – rogerdeuce Feb 28 '17 at 14:03
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    @rogerdeuce: Not all companies do this, mine does not. Even if they did, would you rather pay a few extra dollars in car insurance rates or thousands to banks? The average US household pays over 5K in credit card interest per year. Is doing so worth savings $8 per month in car insurance? – Pete B. Feb 28 '17 at 14:28
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    @PeteB. But the problem that those with 5k in interest payments have is that they aren't super great at money management and don't typically have the ability to put into savings. Building up a deposit for things is not mutually exclusive with developing good credit. Simply getting a credit card and paying it off every month builds up a good credit score, and you can do this at the same time you build up a savings. And this guy's part time job is never going to build up a large enough deposit for something like a house. Far better to do both. – Shufflepants Feb 28 '17 at 15:30
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    I don't think anybody would advocate making interest payments just to build a credit score. But if he uses credit cards and pays off the entire balance after the statement, he will be building his credit score and earning rewards without paying interest. Cash back, sign up bonuses... Why not take advantage of these? They're baked into the cost of everything we buy due to credit card fees. – Comptonburger Feb 28 '17 at 17:20
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Any kind of credit contract such as a mobile phone contract (could be SIM only or with a handset) would also help increase your number of accounts and demonstrate a track record of responsible management and repayments. If you have a Pay As You Go phone at present consider a SIM only contract with the same network, and if your parents currently pay for your phone consider if it would be worth switching it into your own name.

Also make sure that you are registered on the Electoral Role at your permanent address and have at least a minimum payment direct debit set up on your credit card (even though you state you intend to repay in full) to make sure you don't forget a payment as this will disproportionately affect your score when combined with young age and few other accounts.

Lastly ensure that you have a decent amount of "head room" on your rolling credit accounts like credit cards and aren't using more than 80% of the credit available to you through your monthly spending, if necessary by asking for an increased limit from your company (and then not using it).

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One of the other things you could do to improve your score would be along the lines of what Pete said in his answer, but using the current financial climate to your advantage.

I'm not sure what interest rates are available to you in the UK, but I currently have 4 lines of credit aside from my house. One is a credit card I use for every day purchases and like you pay off immediately with every statement.

The other three are technically credit cards, however all three were used to make purchases with 0% financing. The one was for a TV I bought that even gave me 5% off if I pay it off within 6 months. That cash has been sitting in my savings since the day I bought it.

I'm making regular payments on all three, but not having to pay any interest. My credit score dropped 25 points with the one as it was an elective medical expense (Visian eye surgery), so for the time the balance is near my credit limit. However, that will bounce back up as the balance lowers. My score was also able to take that hit and still be very high.

If you don't have 0% (or very close) available, your better bet would be to follow the other suggestions about saving for a sizable down payment, or other every day expenses like a cell phone.

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You can improve your credit score simply by being an authorized user on someone's credit card account. They don't even physically have to give you a card to use, they can just add you to the account as an authorized user and your credit score will be affected. Be forewarned though, it can be negatively impacted as well. Only participate in such a scheme if it's with someone trustworthy and reliable.

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    This may or may not work depending on the credit card company. Do your research first. – NL - Apologize to Monica Mar 1 '17 at 14:08
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When you say "promptly paying off the outstanding balance", do you mean you pay it off literally as soon as you have incurred the debt? It is important to actually let the debt post on a statement before you pay it off. If you pay it off before the statement posts then this won't help your credit at all. Once the statement posts you can pay the entire balance off before the due date and you will still pay no interest.

Assuming you are allowing the balance to actually post on your statements, you can simply continue to do this and your credit score will improve over time as your account(s) get older and you show that you are reliable.

The only other way to improve your credit score is to open more accounts. In the short term this will actually hurt your score, as it will decrease your average age of account and add an inquiry. However in the mid-long term, this will improve your score as having more accounts of a variety of types is better for your score.

Having an installment loan such as an auto loan or home loan is good for your score as it is different from a credit card - however you should definitely not engage in one of these unless it makes financial sense for other reasons. Don't add debt just to build your credit score.

You could just open more credit cards. Like I said it will hurt your score in the short term but improve it in the mid-long term. Open cards with a variety of benefits so you can use them for different things to get better rewards.

  • Thanks for the advice. How many years are we talking about when you say "mid-long term"? – turnip Feb 28 '17 at 9:09
  • It depends on how many accounts you already have open. If you have 5 credit cards already, opening a new account will only lower you average age of account by 1/6th. But if you only have 1 account open, opening a new account will lower your average age of account by 1/2. For my first couple years of credit history I opened a new credit card every 6 months and each time my score recovered within a few months. – Comptonburger Feb 28 '17 at 9:16
  • Interesting, I had not thought about it this way. I am wondering whether it is worth having more than one credit card if my monthly expenses are only about £400 - what do you think - is it worth separating that amount into, say, 2 cards? – turnip Feb 28 '17 at 9:40
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    @n00b I don't appreciate your tone. The credit bureaus do not have a continuous view of your credit card usage, they only see what is reported. If you pay off your card before the statement, then to the credit bureaus it will look like you never used the card at all. You have to let the debt get reported, and then pay it off. Like I said, if you pay off the full balance before the due date, you will still not pay interest - so I am not trying to trick people into paying interest here. – Comptonburger Feb 28 '17 at 17:14
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    @Petar I would say yes simply because there is no cost to having another credit card (as long as they have no annual fee). If $100 of your expenses are gasoline and $300 are groceries you could get one card with a high reward percentage on gas, and one card with a high reward percentage on groceries. If you open more cards now, it will also mean that when you want to open more in the future, your average age of account will take less of a hit. – Comptonburger Feb 28 '17 at 17:16
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US based so I don't know how closely this translates to the UK, but generally speaking there are three things that contribute to a strong credit score.

Length/volume of credit history.
This is a combination of how many accounts appear in your history along with how long they have been open. Having a series of accounts that were maintained in good standing looks better than only having one. Maintaining an account in good standing for a prolonged period (3+ years) is better than a bunch of short term items. "Ideally" your credit history should contain a mix of term loans that were paid per contract and a few (1?) revolving account that shows ongoing use. The goal is to show that you can handle ongoing obligations responsibly, and manage multiple things at the same time.

Utilization.
Or how much you currently owe vs how much people have agreed to lend you. Being close to your limits raises questions about whether or not you can really handle the additional debt. Having large availability raises questions about whether you would be able to handle it if you suddenly maxed things out. Finding the correct middle point can be challenging, the numbers I have seen thrown around most by the "experts" is 20-30% utilization.

Recent Activity.
Or how much new debt have you taken on? If someone is opening lots of new accounts it raises red flags. Shopping around for a deal on a auto loan or mortgage before settling on one is fine. Opening 5 new credit lines in the past 6 months, probably going to knock you down a bit. One of the concerns here is have you had the accounts long enough to demonstrate that you will be able to handle them in the long term.

One route that was suggested to me in my early years was to go take out a 6mo loan from a bank, and just place the money in a CD while I made the payments. Then repeat with a longer term. Worst case, you can cash out the CD to pay off the loan in an emergency, but otherwise it helps show the type of history they are looking for.

All that said, I have to agree with Pete B's answer. Don't play the credit game if you don't really need to. Or play it just enough to stay in the game and plan your finances to avoid relying on it. (Advice I wish I had taken long ago.)

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If credit scoring works in the UK like it does in the US, then I think the fact that you own+use a credit card and pay off your everyday expenses will give you perfectly good credit. Just keep doing what you're doing.

I have seen people in the United States with very high credit scores based solely upon owning & occasionally using a credit card, paid in full and on time every month.

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An activity which can help improve your credit score and actually make you money is stoozing. It's a little complicated but can be beneficial to do.

Using either a credit card which allows fee free money withdrawals from cashpoints or building up debt using your credit card gives you access to your credit amount.

You then use a long term 0% balance transfer card to transfer the debt which you pay off at the minimum rate. It's 0% so no costs are associated except for the initial fee paid for the balance transfer amount. The money that would have been used to pay off the credit amount (or money withdrawn from a cashpoint) can then be deposited in a savings account so you are now earning interest on the credit balance.

Continuing to make monthly minimum payments via direct debit will help improve your credit rating and the savings money will earn interest. (it is also available if you suddenly need to pay off the 0% card)

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    I'd add that should be very controlled stoozing, perhaps one third of the credit limit (and perhaps with more than the minimum repayment). Not trying to max out the card as I am trying to when stoozing. That does affect my score - downwards, but I do not need it to be high here and now. – nsandersen Mar 1 '17 at 23:15
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Buy a car. Vehicle loans, like mortgages, are installment loans. Credit cards are revolving lines of credit. In the US, your credit score factors in the different types of credit you have.

Note that there are several methods for calculating credit scores, including multiple types of FICO scores.

You could buy a car and drive for Uber to help cash flow the car payments and/or save for your next purchase.

As others have suggested, you should be very careful with debt and ask critical questions before taking it on. Swiping a credit card is more about your behavior and self-control than it is logic and math. And if you ever want to start a business or make multi-million dollar purchases (e.g. real estate), or do a lot of other things, you'll need good credit.

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    Nobody should take out an auto loan just to build credit... – Comptonburger Mar 1 '17 at 6:34

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