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When hearing the words ‘credit card’, many might spin on their heels to move as far away from the idea as possible. However, owning and sensibly using one can open a doorway to a number of additional finance sources and benefits, such as mortgages and cashback deals (depending on the card). Express.co.uk spoke to Tim Chong, co-founder of Yonder, to find out more about the importance of building credit, what banks really look for when judging a person’s reliability, and the best way to reap the rewards from a good score.
Mr Chong told Express.co.uk: “There are a range of credit scores that span across every bureau. Although many think that score is important, what banks are actually looking at is your credit record, which includes all of your loan and credit card payment history.
“Lenders will look at this to judge how reliable you have been when it comes to making payments. It’s incredibly important to build a reputable credit record as early as you can, in order to help prove to lenders that you can pay back future loans and mortgages.”
As an “infinitely more useful financial instrument than debit”, Mr Chong described how he feels there should certainly be more conversation about the importance of credit.
He said: “In terms of future-proofing your finances, the conversation on the importance of credit needs to ramp up, especially for young people who are warned away from credit cards thanks to decades of misaligned incentives for credit card companies and their customers.
“If we use credit cards the same way as we do debit, for example paying for holidays and buying our everyday goods, we are at less chance of being exposed to fraudulent activity. We will also be entitled to real-time value reward incentives like restaurant deals and cashback, whilst building up our credit score responsibility.”
According to Mr Chong, the conversation around credit has become so tainted that young people are avoiding credit cards altogether, while still embracing buy now and pay later schemes at an “alarming” rate.
He said: “It’s still unclear how [buy now pay later] products will impact credit ratings, even when we pay them back on time. Like any form of credit, they can be detrimental to our credit ratings when we default on payments. There needs to be a bigger awareness of this to help protect young people’s finances.”
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What actions negatively impact a person’s credit score?
A number of typically unsurprising moves can taint a person’s credit score, including not paying the minimum amount on the card each month, using too much available credit, and opening and closing lots of different accounts.
Mr Chong said: “Keeping unused credit cards open can actually be seen as a positive as it adds to your overall available credit.”
He continued: “A quick way to see your credit rating impacted negatively would be to default on any credit products you’re using by missing more than a couple of payments in a row. If you ever think you may struggle to make a payment, it’s important to let your bank or credit provider know right away so they can help you get back on track.”
Interestingly, only living in the UK for a short period of time may also make it difficult to get any form of credit.
Mr Chong explained: “Your financial history in your previous country counts for nothing when you move, so it’s important to begin rebuilding your credit rating when you move countries. That’s one of the main reasons why we created Yonder. We wanted to introduce a product that made building your credit score accessible for people who had only recently moved to the UK.”
How to improve a credit score
While there are many ways to cause a credit score to drop, there are equally many ways people can help improve theirs, too.
Mr Chong said: “One of the best ways to build up your credit score is by using and paying off a credit card each month. As long as you are able to keep the payments going each month, your credit score can steadily improve and your financial freedom in the future along with it.”
He continued: “Other actions include making sure you have your bills in your full name and not just in your partner or housemate’s name.
“Making sure your address information is accurate is also important so that future credit providers can match your name and your information. Without that, you may become what’s called ‘credit invisible’.”
People must make sure they pay these bills on time and try only using around 30 percent of their credit limit each month.
Mr Chong said: “Once you are able to meet regular payments for a long period of time, you will be able to show that you are a reliable owner of money.”
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