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What you need to know about building credit

posted by Carla on Friday, 18 May 2018

If you decide to pursue a career as a mortgage or financial advisor, you will eventually come across a client who needs to build their credit profile. They will be looking to you for guidance, and you’ll need to ask the right questions to offer sound advice. But don’t worry, Oxbridge has you covered with an outline of some of the basics. 

Credit scores in a nutshell

Credit scores define creditworthiness and can be checked on sites such as Experian. However, before carrying out any checks, make sure that it is a ‘soft inquiry’ and not a ‘hard inquiry’. Soft inquiries don’t impact scores, whereas hard inquiries will. 

Low credit scores may make it harder to convince a lender to approve an application. Not to worry, though, scores can be improved through credit building.

Is your client’s credit file considered thin?

If they don’t have enough of a credit history for a credit reference agency to generate a score and report, they will sometimes be referred to as having a ‘thin file’. This means that they will need to start building their credit if they want to generate a report and ensure they’re an attractive prospect to lenders. 

Of course, building credit takes time, but by using credit building products effectively, managing finances, and getting on the electoral roll (if they aren’t already), they will be able to receive a report eventually.

Once you understand what all the different credit-builder options are, you’ll be in an excellent position to recommend the right route for your client to start growing their credit profile.

How to build credit

Building credit doesn’t need to be as dull, time-consuming, or rigorous as it sounds. Knowledge is key! We have all been told to “shop around” when it comes to our finances. By choosing the right method, credit scores can easily be built.

To help, we’ve rounded up and summarised some of the options you are likely to come across. Hopefully, by decoding the finance jargon, you will be able to advise your clients based on their individual circumstances. 

Credit cards to build credit

There are credit cards and loans specifically designed for people with a limited credit history. This type of finance builds on the concept that, by taking out one of these forms of credit, your clients can demonstrate their ability to meet their repayments consistently. 

Making use of these types of cards or loans will help to build a credit score, which will lead to lenders having more faith in your clients. However, as with any borrowing, credit-builder cards and loans must be used sensibly. 

Suitable for: Individuals with a limited credit history.

Be aware: ARP rates may differ, so ensure your clients look into this before deciding which application to make. 

To get the most out of this method of credit building:

  • Always pay back the full amount borrowed every month
  • Avoid making cash withdrawals on the credit card
  • Always stay within the credit limit

Credit-builder prepaid cards

When looking to build a credit score, you might advise your client to take out a credit-builder prepaid card. This works by ‘loading’ cash onto a specific card and using it to pay for goods and services. To do this, a monthly fee will have to be paid. 

The good news is that there are no credit checks or proof of income requirements, so they are easy to apply for. Once your client has signed up, they simply add a credit builder service to the card so that they can draw on a year’s worth of monthly fees. This is usually between £5 and £10 each month.

Suitable for: Individuals avoiding credit checks or proof of income.

Be aware: There are a few things to bear in mind when choosing this method to build credit:

  • There is a limit of how much can be spent with these cards
  • They aren’t protected by section 75
  • There may be associated fees

Logbook loans

Logbook loans are secured loans where ownership of a car, van or motorcycle is transferred to a logbook lender (the vehicle must be worth more than £500 with no finance outstanding). With this form of lending, your client will get to keep and use their vehicle, although, for the duration of the agreement, they will not hold ownership.

It’s important to note that if they can’t make their repayments, they could lose their vehicle. What’s more, interest rates for this route are a lot more expensive than other, more traditional, forms of lending; so if they are struggling with debt, you shouldn’t recommend this avenue for credit building.

Suitable for: Anyone who legally owns their vehicle. Many lenders offering logbook loans are willing to overlook a poor credit score.

Be aware: Your clients won’t have the same consumer protections with a logbook loan than they would with other agreements. 

Guarantor loans

If your clients are struggling to get credit, they might be eligible for a guarantor loan. These are unsecured loans that require a guarantor to co-sign the credit agreement, essentially making the ‘guarantor’ liable if your client defaults on payments. 

As you might expect, it may be difficult to convince someone to be a guarantor. This is because there is a lot of risk for them. If repayments aren’t met, the person who co-signed will have to pay them on your client’s behalf.

Suitable for: Someone with a contact who is willing to take a risk as a guarantor.

Be aware: Asking a friend or family member to be a guarantor and then defaulting on the loan can cause friction. Your clients must be sure they can make the repayments before putting themselves, and a loved one, in a potentially tricky situation.

Building a solid credit score rating

A good credit score is essential for everyone. Building a solid credit history and maintaining a high credit score can have a dramatic impact on your eligibility to be accepted for loans or financing. As a financial advisor, you must understand all the options available to help your clients build a solid score.