What credit is and how to build your credit report

Your credit history and credit report are important parts of personal finance and can have a huge impact on your future. 

James Jones, who leads the public education programme at Experian, the UK’s leading credit score, helped us look at:

1. What credit is and why it matters

2. How lenders decide whether to give you credit 

3. What’s included on a credit report

4. How to build a credit report from scratch

5. How a credit card 💳 can contribute to (or damage) your credit report

1. What is credit? Why does it matter? 🤷‍♀️

Credit is money, goods or services you receive and use, but only pay for at a later date. There are loads of examples of credit, some that you probably haven’t thought of as credit before:

• Mortgages 

• Personal loans

• Car finance

• Credit cards

• Instalment accounts e.g. for home or car insurance 

• Overdrafts 

• Mobile phone contracts 

• Energy bills (if you’re on a credit meter, rather than paying upfront)

• TV/broadband

• Rent (usually paid upfront but if you miss your payments, you’ll get into arrears, where you owe your landlord money) 

• Student loans

Credit helps you spread the cost of large purchases over time – if mortgages didn’t exist, very few people could afford to buy a house because you’d have to pay for the whole thing upfront! 🏡 

It can allow you to manage mismatches between when you receive your income and when you need to buy stuff. You might need to buy food halfway through the month but might not receive your salary until the end of the month – a credit card could help manage this difference in timing. 

Credit also gives you ways to invest in your future. The most obvious is your student loan: with most UK universities charging £9,250 a year, a tuition fee loan is crucial to allow most students to access university, something which will hopefully change their lives for the better and provide increased earning potential. 

2. How lenders decide whether to give you credit

Lenders such as banks use lots of factors to decide who should receive credit. This can include their own records (if you’ve been a customer of theirs before), the application form you fill out and your banking transactions. Another key influence in a lender’s decision is your credit report. 

What is a credit report?

Your credit report is a history of your financial payments over the past 6 years. In the UK, there are three main credit reference agencies (CRAs) that put together credit reports:

• Experian

• Equifax

• TransUnion

3. What’s included in a credit report?

• Electoral roll information – whether & where you’re registered to vote (this helps to verify your name and address and is an indicator of stability)

• Existing credit accounts 

• Previous credit applications

• Financial links i.e. anybody you’ve taken credit out with before 

• Previous names 

• Previous addresses 

• Fraud flags 

• Any court judgements or insolvencies 

What’s not included in a credit report?

• Outcomes of previous credit applications – your credit report shows when you’ve applied for credit but nobody can see if you were successful or not

• Criminal convictions

• Characteristics e.g. race/ethnicity/sexuality 

• Financial data about other people

• Buy Now Pay Later usage – but this is expected to be included soon

• Your income

• Council tax

• Subscriptions to streaming services

• Any savings accounts you have (including ISAs)

These last four in italics aren’t normally included in your report, but if you want to have them added, which can have a positive effect, you can do this with Experian Boost.

4. How to build a credit report from scratch

If you have a very limited financial history and are wondering where to begin building your credit history, here are some tips to get you started: 

• Make sure you’re registered to vote 🗳 

• Set up a bank account (and keep it in good order)

• Get your name on some bills e.g. phone contract, energy bills, TV/broadband 

• Think about getting your rent recognised on your report: this isn’t automatically done but there are services like Canopy and CreditLadder that allow you to add this, giving your credit report a bit more substance 

• Consider taking out a credit card – but only if you can be disciplined! 

5. How a credit card 💳 can contribute to (or damage) your credit score

Using a credit card can be a good way to build up your credit report and improve your credit score. But let’s be clear: you don’t need a credit card to build up a good credit report. 

As long as you follow the other tips, you can still achieve this without the need for credit cards. This is really important as they can cause lots of damage if not used well. 

If you fail to make at least the minimum repayments on your credit card, this will show up negatively on your credit report. Plus, by paying off any less than the full amount each month, you can end up paying back a lot more than you borrowed in the first place, especially if your credit card has a high APR. 

How to use a credit card to build credit

• Make at least the minimum repayment each month – but ideally clear your balance each month using an automated Direct Debit 

• Always stick within your credit limit. Keeping your balance as low as possible and having below a 30% utilisation rate (the percentage of your available credit limit that you actually use) is best 

• If you trust yourself, accept any credit limit increases your lender offers you – as this will reduce your utilisation rate 

• Don’t withdraw cash on a credit card – this is flagged on your credit report, can be seen as a sign of financial stress if done regularly and you might be charged fees, too 

Here’s the recording of the full webinar:

Still keen to learn more about credit? We’ll be releasing a second blog soon, specifically about credit scores. In the meantime, you can check out our credit score pathway and test your knowledge.

Further learning

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