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3 reasons why a credit history is essential

Why is a credit history so important? What does it mean if you don’t have any? Here’s three reasons why your credit history matters.

21 August 2017Andre Spiteri 3 min read

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While you might think you could go your whole life without ever using credit, the reality is often very different.

Most people will need credit at some point in their life - to buy a home, a car or to split a larger purchase into smaller repayments. Which is where a credit history comes in. But even if you don’t plan to do any of these things, a credit history is still important. In fact, you’d be surprised at the ways not having one could affect you.

Your credit history is recorded in your credit report. It's made up of all of your past borrowing behaviour. Here are 3 practical reasons why having a good credit history is essential.

Imagine someone you don’t know asks you to loan them £2,000. They promise that you can trust them. And they say they’ll pay it all back for sure. You’ve even shaken on it. But there’s no way you can check this.

Would you loan them the £2,000?

Probably not, right?

At its heart, credit scoring is all about limiting risk. Lenders want to make sure you’ll pay back what you owe. So they look at the information they have on you, and use this as a guide to how reliable you are. The information they rely on includes:

  • the details you’ve provided in your application

  • your past relationship with them (if this applies)

  • your credit history and current financial situation, which are contained in your credit report.

Like the stranger who asks you for money, you can tell lenders they can trust you as much as you want. But, without a credit history to back you up, they can’t be sure. As a result, the chance that they’ll accept your application will go down.

A good credit history won’t just increase your chances of getting accepted for credit. It can get you better deals. So even if your application is accepted, you could still be at a disadvantage if you’ve got a limited credit history. In particular, it can affect:

  • your credit card limit

  • your interest rate

  • whether you qualify for any special offers, such as a 0% interest period on a credit card.

Once again, it’s all about risk. Without a credit history, it’s harder to tell whether you’ll repay your debts on time. So, to offset this risk, your interest rate could be higher. And you won’t be considered suitable for certain products or offers.

In other words, not having a credit history limits your choices. And it may make borrowing more expensive.

Even if you don’t plan on getting a credit card, personal loan or mortgage anytime soon, not having a credit history can still affect you in surprising ways. Here are just a few examples:

Renting a property

According to recent research, 48% of private UK landlords now perform credit checks on prospective tenants. This holds especially true in London, where 95% of landlords say they do it. Landlords will particularly look out for any defaults, CCJs or bankruptcies on your file.

Getting a mobile phone contract

A phone contract is a type of loan. You get the phone today and pay for it in instalments. Consequently, most network providers check your credit report. And, if you don’t have a credit history, you may be turned down.

Buying a mobile phone

So you’ve decided against a contract phone and want to buy it unbundled instead. Good thinking. But, again, getting your phone unbundled can involve a small personal loan. As with any other form of credit, without a credit history you have less chance of being accepted and getting a good interest rate.

Paying for insurance

Like getting a phone contract, paying your insurance in monthly instalments is also a form of credit. So, if you want to pay monthly, your insurer will usually carry out a credit check. Without a credit history, you risk rejection. Which means you’ll have to pay the full year upfront even if you can’t afford it.

Getting a job

When you're applying for a job, some employers may ask to check your credit report. Typically, this would only happen if you're applying for a position where you'll be handling money - such as in a financial or legal role. If you haven't handled your own money particularly well in the past, then some employers will see this as a red flag. Employers can only check with your permission, but saying 'no' might not be the quickest ticket to employment.

Key highlights

  1. Credit scoring is all about risk. Without a history of good credit, lenders can’t be sure they can trust you. This means they’re less likely to approve your credit application.
  2. Even if you’re accepted, not having a credit history may limit your choices and make borrowing more expensive.
  3. Not having a credit history doesn’t just affect your ability to get a loan. It can also influence your daily life. Landlords, mobile phone providers and insurance companies may also carry out credit checks.

Andre Spiteri Image

Written by Andre Spiteri

Financial Writer

Andre is a former lawyer turned award-winning finance writer.