Hands up if you’ve got a 5-year plan. No? You’re not alone. More and more millennials are adopting a ‘live now’ mentality over planning for the future – with 44% of 18 to 34 year-olds saying they have no pension provision whatsoever1.
But whether you end up wanting to buy a house or a campervan (or pack it all in to set up an organic soap shop in the Outer Hebrides), there are small steps you can make now that could make a big difference down the line.
Getting approved for a mortgage or loan – or even a mobile phone contract – rides on your credit score. This is the tool lenders use to help decide whether they should lend you money. Your score is based on many factors but it’s mostly influenced by the ways you’ve handled your finances over time.
One of the things credit reference agencies record is whether you pay back any money you’ve borrowed on time. But what happens if you haven’t borrowed money before, or you need to start improving your credit history?
One way to start building your credit history is with a credit building credit card. They are designed for people looking for their first credit card.
Here are some things to think about now for the good of your future plans.
1. Avoid payday loans
When you’re struggling at the end of the month, it might be tempting to go to a payday loan lender for a bit of extra cash to tide you over before payday. What’s the harm if you’re going to be able to pay it back in a week, right? Wrong.
Taking out a payday loan stays on your credit history for 6 years. It can affect your credit score, even if you pay it back immediately. Instead of making that your first option, think about using an overdraft, credit cards or borrowing from friends or family.
2. Get credit for paying your rent on time
Trying to get credit when you don’t have a history of borrowing can be a vicious circle. For example, you apply for a credit card, only to be turned down because you don’t have a credit score.
One easy way to build your credit score is simply to pay your rent on time – using the CreditLadder tool. Pay your rent to CreditLadder, they pass it on to your landlord or agent and then let Experian know the rent has been paid promptly. Having an official record that you pay your rent on time each month shows lenders that you can be trusted financially so, over time, this will help boost your credit score.
It’s a completely free service and all payments are processed by Barclays, as their partner bank, so you know that they’re secure.
Another way to start building your credit history is with a credit building credit card, such as Barclaycard Initial. It’s designed for people looking for their first credit card and you get free access to your Experian credit score.
3. Stay on top of your bills
Moving into a new flat can create a to-do list as long as your arm. But, in between packing, paying deposits and making sure your all-important Wi-Fi is installed, it’s worth ensuring your utility bill payments are set up.
Even one missed or late payment on bills – particularly ones in the last 12 months – can weaken your credit score. The same goes for mobile phone contracts and car insurance and, crucially, for credit card repayments.
Save yourself any stress by setting up standing orders or Direct Debits for all your bills, so you never miss a payment. You can set up standing orders in the Barclays Mobile Banking app, and check your active Direct Debits – download the app and register if you haven’t already. You could also ask your utility providers to change your payment dates so they come straight after payday.
If you’re thinking about taking out any kind of financial service jointly with someone else, their credit score can affect yours once it’s active. So it might be worth asking about this before agreeing to any joint accounts, loans or credit agreements with a partner, flatmate or relative.
And if you’re not living alone, it’s worth noting that the credit scores of those you live with don’t affect yours – whether they’re your flatmate, partner or parents – unless you have a joint financial product (for example a joint account or loan).
4. Destroy unused cards
Purse or wallet cluttered with store cards that you haven’t used in yonks? They could be more than just a waste of space – for some lenders, unused store cards and credit cards are a big turn-off. That’s because you could choose to blow all of that unused credit at any time, which would affect your ability to keep up with credit card, mortgage or loan payments.
On the flip side, lenders like to see that you use financial services on a regular basis. So, cancelling all of your credit cards could affect your credit rating negatively, too. Strike a balance – if you’ve got multiple credit or store cards that are gathering dust, close some cards down but not all. Just make sure you cut them up when disposing of them.
5. Don’t max out your credit card
Just as lenders don’t like it when you’ve got unused cards, they’re not keen on you using your full credit limit. Keeping the amount of credit you use to a maximum of 30% is usually recommended to prove you’re sensible. If you’ve got a credit card with a limit of £1,000, try to keep your balance below £300.
6. Register to vote
Not only are you not able to vote in elections if you’re not on the electoral register, you’re also unlikely to be offered any credit from lenders. Registering takes just a matter of minutes – and, remember, you’ll need to re-register if you change address (link www.gov.uk/register-to-vote).
7. Pay for insurance in one go
Making insurance payments monthly is a good way to spread the cost but it can put a dent in your credit score. Choosing to pay monthly, instead of paying the total upfront, means you’re effectively getting a loan from the provider. This often means you’ll be charged interest on top of your insurance payments, too. So, if you can, it pays to pay off insurance in one upfront transaction.
8. Don’t sit on debt
It might seem wiser to have an emergency or rainy day savings fund but, if you’ve got credit card debts or a hefty overdraft, it’s smarter to pay those off first. Having too much debt hurts your credit score, so pay back what you owe before putting money into savings. And if you’re managing debts from multiple lenders, a debt consolidation loan could help you take control of your finances.
It’s worth noting that both your credit score and the factors that lenders use to determine it aren’t universal. Every lender looks for different things. So, if one rejects you, it doesn't automatically mean others will. And, just in case you’re wondering, student loan debt doesn’t affect your credit score or appear on your credit report.
And remember, managing your money well now puts you in a better position if you need a loan in the future. If you get a rejection, it's always important to check your file for errors before applying again.
We have plenty more money management tips to help you keep track of your money.