If you’re considering saving for a down payment on a house, or getting yourself ready for mortgage payments, it may not seem like the smartest idea.
However, you may be doing more harm than good to your chances of getting approved for a mortgage by avoiding plastic.
More than one in ten would likely be turned down for a mortgage — not because they had a bad credit history full of defaults and debt, but because they have no history at all, research by credit rating agency Experian claims.
If you’re trying to increase your chances of getting accepted for a mortgage, it’s a good idea to take out a credit card. But you don’t have to go crazy, just use it for your weekly shop weekly
Andrew Hagger, of the personal finance website Moneycomms, says having no credit record is “almost as bad as having a bad credit record when it comes to applying for credit” — be it a mortgage, personal loan or any other. credit card.
He adds, “The problem with having no credit history is that a potential lender doesn’t have a track record of your loans on which to base their decision to lend to you or not.”
Indeed, a couple told us how they were turned down for a mortgage on the house they wanted to buy, despite having rented for 12 years without missing a single payment.
Rather than being smart by avoiding credit, as they thought, it played a key role in missing out on a potential dream family home.
Other ways to improve your score
While taking out a credit card and making payments can be one of the best ways to show you are a responsible borrower, there are other ways to increase your score.
– Register to vote
– Avoid County Court Judgments or Insolvencies
– Pay your bills on time – including things like cell phone contracts
Alastair Douglas, chief executive of credit comparison site Totally Money, says that “responsible use of a credit card shows lenders that you can handle your finances,” as lenders want to know that you can track repayments.
“This means you don’t miss any payments, don’t exceed your credit limit, and pay the full balance each month to avoid interest.”
However, if you’ve never owned a credit card before, it can be difficult to figure out which one to apply for from the dizzying array on the market, including balance transfer cards, 0 percent purchase cards, rewards cards, cashback cards, and more.
Both Andrew and Alastair recommend something called a “credit builder card.”
These are cards that are more easily accepted if you have a bad credit score or none at all.
They typically have smaller credit limits than regular cards and higher interest rates due to potentially riskier customers.
Andrew says, “A credit card is a stepping stone to give you the chance to prove you’re taking a good risk, if you’re smart in the way you use it.
‘They are an ideal way to show that you can borrow responsibly, but many people are probably scared of the high interest rates, but if used properly it shouldn’t be a problem.
For example smartphone bank Tandem’s Travel credit card, the lender offering, comes with an APR of 24.9 percent and an initial limit between £150 and £1,200.
Credit builder cards are designed for those with no credit score or with a low credit score, and often have higher APRs and lower credit limits – compare Tandem Bank’s Credit Builder card with the cash back credit card, which is designed for users with good history
This is both a higher APR and a lower limit than the default Cashback credit card, which comes with an APR of 18.9 percent and offers an initial limit of up to £12,000.
Tesco Banks Credit Card Foundation is another example of one of these cards. It comes with an APR of 27.5% and gives you regular optional increases to the credit limit above the initial cap of £1,500 ‘if you manage your account well’.
While for those who have never used credit, there can always be the temptation to go big and buy something like a new sofa or large flat screen TV, Andrew says it doesn’t have to be.
What credit builder cards are there?
“If you take out a credit card, use it to buy something you already buy — like gas or some of your groceries — don’t think you’ll have to spend a lot of money or buy something else.
‘If you pay back your card balance in full every month, you don’t have to pay a cent in interest charges. Therefore, the high rates should not deter you from applying.”
Alastair reiterates: ‘You could use the card for things you would normally buy with your debit card and then pay it off, such as a weekly shop, to show you can manage credit.
“Using your card in this way can improve your credit score without getting into debt.”
But given the much higher interest rates compared to standard credit cards, make sure you claim your balance in full each month and play by the rules.
Otherwise, your creditworthiness will not only deteriorate, but you will also have to deal with hefty interest charges.
In addition, since you are trying to get your credit score squeaky clean, make sure you look at your score too.
You can check your credit score with the rating agencies Experian and Equifax, both of which offer a 30-day free trial, but make sure to cancel before the end of the promotional period.
MoneySupermarket recently launched a free app; CreditMonitor, which allows users to check their creditworthiness after a few short questions and also see what products they might be accepted for.
Andrew also recommends both TotallyMoney and Clearscore, both of which offer a free service and update your report every month, receiving updates via email.
He says: ‘A credit report is a very important part of your total financial arsenal, especially if you plan to take out a mortgage in the coming years.
“Your mortgage lender will go through your credit statement with a fine comb, so you should make sure it’s in good shape before applying for your home loan.”
THIS IS THE FIVE OF THE BEST MONEY CREDIT CARDS