Dear Gareth, my daughter has savings, but no credit card and no credit score. What is the best card for her to build up a good credit score?
Having a healthy credit score is essential to doing the things you want in life – from buying a property and borrowing money to even getting a mobile phone contract. So, it’s essential that you tend to and maintain your credit record.
When you apply for credit, such as a mortgage or a loan, the lender will look for evidence that you are a responsible borrower who’ll be able to meet repayments. This is what your credit report will show. Think of it like your financial CV – the better it looks, the more attractive an applicant you’ll be.
It’s now free to access your credit report with the three biggest agencies in the UK – Experian, Equifax and TransUnion. Experian will allow you to check your score – a numeric indication of your overall credit-worthiness – for free on its website.
Meanwhile, you can check your Equifax score through an online service called ClearScore, and your TransUnion score through Credit Karma. It’s important to check all three, as they all collect slightly different data from different providers – some collect information, for example, from utility companies, which can contribute to building up your score.
You should also make sure the information is correct and rectify any mistakes, which could affect future applications.
The first step your daughter should take is to register to vote and get on to the electoral roll. Lenders use this to confirm that you live at the address given when you apply for credit and can give you an instant boost to your credit score.
Living with or being married to someone who has a bad credit rating won’t affect yours – but taking out a joint financial product with them will. Opening a joint current account, for example, will create a ‘financial association’ between you and the other account holder.
If your daughter has ever jointly held a financial product with someone she no longer has a relationship with, ask all three credit reference agencies to break this link so that her ex-partner’s financial situation doesn’t have any impact on credit applications she makes in the future.
These are some essential steps to take to improve your credit score, but if you’ve never borrowed money before, how can a potential lender properly assess whether or not you’re a good bet and will meet repayments?
One option is to take out a type of credit card designed to help you build up a good track record of successfully managing credit. These ‘credit builder’ cards are offered by a range of providers – some are well-known, such as Barclaycard, Capital One and Tesco Bank, and others have less of a mainstream presence, such as Aqua, Marbles, Tandem and Vanquis.
Of these, Tesco Bank has one of the cheapest APRs (27.9 per cent) and has been awarded Which? Recommended Provider status on account of its good quality cards and excellent customer service.
These cards are offered to people who have a ‘thin’ credit record, like your daughter, and also people who have had problems managing their credit in the past. As a result, they tend to charge very high interest rates – anywhere between 25 and 60 per cent – to compensate the lender for the additional risk it’s taking on. If your daughter applies for one of these cards, she should make sure she sets up a direct debit to repay the balance in full each month to avoid high interest charges.
To begin with, she’ll likely be offered a very low credit limit, usually £250 to £500. As she proves that she can manage her credit, the provider may look to increase her limit. Watch out for this, as it is probably an indicator that her credit health has picked up and she may be able to apply for a more mainstream – and less expensive – credit card.
Applications for credit are recorded on her credit report, and too many failed applications can damage her score further. Before applying, she should use an eligibility tool, which takes some basic details from her and gives her a probability of being accepted for a card. The big comparison sites offer these tools, along with Moneysavingexpert.com and Experian.
Gareth Shaw is the Head of Money at which.co.uk.