An expert guide to borrowing for the first time

When you first start thinking about borrowing money, it can all be a bit daunting. How do you know what your credit score is? What do you do if you get into debt? If you need some advice, we’ve got you covered. We’ve teamed up with financial experts, Experian, to bring you this simple guide to borrowing.

Applying for credit

When you apply for credit, that means you’re borrowing money, or access to goods or services, with the understanding that you’ll pay it back. Read our guide to types of credit.

You don’t have to apply for credit and you should never feel pressured into doing so. But if you’ve decided you want to, or there’s a particular reason for borrowing (such as starting higher education), then understanding how it all works will really help.

Which address should I use to apply?

When you apply for credit, lenders will check your name and address against the electoral roll (the register showing the names of people registered to vote from each address). If you’re a student, you might stay registered to vote at your family home or you might register at a different term-time address. Whatever you do, it is essential you register to vote somewhere and give that address when you apply for credit.

Why have lenders checked my credit score?

Lenders often use credit scoring to assess whether you’ll be able to pay back a debt on time and in full. Your credit score is based on how customers similar to you have managed their credit accounts.

The exact way lenders assess credit applications varies from company to company, including how they work out any credit score. This is why some lenders say yes when others say no. Some lenders like to check that you have paid credit off on time in the past and so may refuse your application if you haven’t had credit before.

Can my credit be influenced by other people?

Your credit report can only be linked to other people if you have a financial link with them (such as sharing a joint account). Paying the rent together doesn’t count. However, you will be linked to people you share with if you have all put your names on a credit agreement.

Your report can also become linked to someone else’s if one of you guarantees a credit agreement belonging to the other. So, for example, if one of your parents acts as guarantor for a credit account you take out then your credit histories are likely to become linked.

People who share a home often have the household bills in one name, but it might be better to arrange for them to be in joint names. If bills are just in your name, you are totally responsible for paying them.

What if friends owe me money?

If your friends owe you money, the fact that they should have paid part of the debt will not protect you, so be really careful about lending money.

Whether or not you manage to get them to pay their share, you’ll be held responsible if the company decides to try to recover the debt. If you can’t pay you might end up with a court judgment against you. If this happens, you can get support but it will make things difficult.

Tips for borrowing money

Borrowing as a student

• If you’re a student, you’ll should take advantage of one of the special student bank accounts on offer.
• Avoid the gimmicks and free gifts. You should pick the account that offers free banking, the best interest rates and a sensible borrowing limit.
• A bank with a branch close by is handy, although being able to bank over the phone and by internet make this less important.
• Many banks will offer interest-free overdrafts to students, but remember that you will need to pay the money back when your course ends.
• Never go over your overdraft limit without permission. Information about current-account overdrafts and how you manage them is included in your credit report.
• Always speak to your bank if you are struggling.
• Student loans are not included in credit reports, although any impact on your take-home pay can be factored into a lender’s decision.
• Read this guide to avoiding student debt.

Take advantage of student loans

If you’re going to need to borrow money, you should first approach the Student Loans Company about taking out a student loan. The Government links the interest rate to inflation and you don’t have to start paying the loan back until you are earning more than a certain amount.

You should speak to a student adviser in your students’ union or college to make sure you are getting all the financial help (including grants and trusts) you are entitled to. They’ll also be able to give you valuable advice about budgeting and other ways to help you manage your money.

More top tips for borrowing

• Don’t forget to budget.
• If you do apply for a form of credit (such as a credit card, store card or personal loan) be very careful.
• Work out the real cost of any credit you get, including how much you will pay back in total.
• Draw up a budget to make sure you can afford the repayments.
• Don’t forget to include costs that only happen once in a while, such as annual charges.
• The APR (annual percentage rate) is designed to help you compare the cost of different credit products. Basically, the higher the APR, the more the credit costs.
• Be aware that although Buy Now Pay Later may be convenient, most options don’t currently feature widely on credit reports so they are unlikely to help you build a credit history.
• Use all the free tools available to take control of your credit and financial wellbeing.
• If you’re planning to apply for credit then review your credit score (Experian gives everyone a free online account)
• Use free services to see if you can improve your credit score, and then use eligibility-checking services to help make sure you only apply for things you’ve a good chance of securing.

Using credit cards and store cards

Credit cards and store cards can be very expensive if you don’t pay them off on time, and in full, every month. Some cards charge interest on the whole amount shown on your bill, even if you do pay some off. So check the small print before you apply to see if the card is right for you, and look at different cards before you decide.

Only apply for credit once you have decided on the best deal. When you do apply, your application will give the lender permission to pass details about your account to a credit reference agency. Lenders usually update this information with your latest balance and repayment record.

Building credit history

To build up a good credit history you must make all your payments on time. Your credit report is very important and goes back six years.

How you manage any credit you have now will affect your chance of getting credit in the future. So, use credit wisely and budget to make sure you don’t spend too much.

It’s often a good idea to set up direct debits to pay regular bills. You often get a discount if you do this. You should also check your bank and credit-card statements very carefully each month to make sure you know where you are spending your money.

What if I’m refused credit?

If you are refused credit, find out why as soon as possible. Only the lender you applied to for credit knows why they turned down your application. They should be able to tell you the main reason if you ask.

If the lender says it was because you have very little credit history, offer them other information that shows you are responsible and can manage credit. This might include a statement from your bank, information from a landlord or a council tax bill.

If you have a bank account, you may find your bank more willing to give you credit than a lender who doesn’t know you. Credit reference agencies keep a record of these checks (called searches) for one year.

If your credit report shows a large number of credit-application searches in a short space of time, this might make you look desperate for credit. It can also be a sign of fraud. So, find out why your first application was refused before you apply again. Checking your own credit report doesn’t create searches that can affect your chances of getting credit.

Steer clear of credit repair companies

Never be tempted to turn to so-called credit repair companies. These companies claim to be able to get rid of negative information from your credit report in return for a fee. But they can’t do anything you can’t do yourself for free.

Many credit repair companies will fail to ‘repair’ your credit report. In fact, some may make matters worse. Some are simply loan sharks and will offer you a loan at a very high interest rate. Don’t take it. When you apply for credit, your application will usually give the lender permission to check your credit report.

I’m struggling with my repayments

Help is at hand. If you are struggling with any repayments, let your lenders know as soon as possible. If you keep in touch they will try to help. They may let you reduce your repayments for a while.

The same is true if your circumstances change suddenly (for example, if you become ill or your income drops). Let lenders know and get free help from an organisation which provides money advice.

Should I declare myself bankrupt?

Being made bankrupt is a last resort. Even though many people who are made bankrupt now come out of bankruptcy (are discharged) within a year, the bankruptcy stays on your credit report for at least six years. And most people who are made bankrupt still have to repay their student loans in full.

Even after you have been discharged, the fact that you have been bankrupt in the past may stop you getting credit. It may also stop you getting the best rates.

Mortgage lenders often ask if you have ever been bankrupt. Many landlords and employers also check your credit report for court judgments and bankruptcies (but they cannot see your credit account information).

So declaring yourself bankrupt might also make it difficult for you to rent a flat or get the job you want. If you are considering declaring yourself bankrupt, speak to a professional debt adviser first.

Useful contacts

Experian Customer Support Centre (phone: 0344 481 8000)
National Union of Students Advice (about all aspects of student life, including money)
National Association of Student Money Advisers (advice for students on money and funding)
Moneyfacts (free help and advice about money and debt)
Payplan Phone (phone: 0800 280 2816)

If you need support with borrowing money

If you’re dealing with any of these issues and need support, know that you’re not alone and we’re here for you. Get in touch with The Mix’s team for free and confidential support.

For more information about money and tips for managing your finances, please visit The Mix’s money hub.