There’s no question that when it comes to home ownership, things really were better in the old days. Actually, you don’t even have to go back all that far to find a time when investing in bricks and mortar wasn’t the distant dream that it is for so many young people today. Even in the late 90s, when Generation X were browsing estate agents’ windows for their first home, they could expect an average house to set them back just over three times the typical wage. They didn’t have student loans to pay back either.

Not so for millennials. The average U.K house price has risen by over 250% since then, while the median wage has only increased by just under 70%. To buy a home in 2018 will cost a buyer earning £26,500 (the average wage in the U.K) an average of more than 7 and a half times their annual income. All of which means most people are coming a lot later – if at all – to home ownership.

Does that matter? It’s true that the British tend to put more stock in owning property than many other cultures do. The rights and wrongs of this are a debate for another time. But one thing is for certain – homeowners do have one huge advantage over renters in one rather important area. They are all building credit simply by paying their mortgages.

That’s right. Baby boomers, Generation Xers, and everyone else who made their way onto the property ladder before the gap between earnings and house prices started to widen have been steadily been building their credit rating with every mortgage payment they make. And this reaps a number of benefits.

The Advantage of a Good Credit Rating

Having a good credit rating is a little like having a membership to an exclusive club. You’re more likely to be accepted if you apply for loans and mortgages. You’ll be offered better interest rates when you do. And you’ll find utilities companies such as power, phone and internet providers all willing to offer you better prices for their services.

So how do you get to join this club? Well, there are lots of ways to build your credit rating but one the most effective ways to build your credit is to make regular, ‘on-time’ payments on any loans you’ve taken out. And the biggest loan you’ll ever take out is almost certainly a mortgage.

Consider for a moment the case of an average millennial saving desperately for their first deposit. They do what they can to live within their means. They avoid borrowing and ‘pay-day loans’. They opt for a cheaper pay-as-you-go phone contract. But when they finally make it into the bank and dump their hard-earned envelope of cash down on the desk, the bank comes back with a refusal. The reason? The wannabe home owner don’t have enough of a credit history.

The Credit Rating Conundrum

It does seem counterintuitive that those able to survive without borrowing money all the way up until the time they need a mortgage should be penalised. To understand why this is the case, we have to consider it from the lenders’ point of view.

Banks receive an overwhelming amount of applications for credit and simply don’t have time to consider each one on a case by case basis. Therefore they rely on data generated by past transactions to act as a kind of ‘firewall’ to help them eliminate potential risks. If you don’t have much data for them to go on, it’s almost the same as having a bad credit history; there is nothing there to prove you aren’t a risk.

The system’s not perfect but as far as the lenders are concerned they’d rather miss out on a small number of ‘good’ customers than accept a higher number of bad ones. Technologies such as machine learning are making the process of decision making more accurate, but it will be a long time before they are able to say with 100% certainty that someone with no history will be a safe bet. Until that time, those looking for any kind of loan need to look at ways to build their credit rating.

What credit providers do (and don’t) consider

How to Beat the Credit Rating Conundrum

So millennials looking to get onto the property ladder are left with a dilemma. They need to build a credit rating, but taking out a loan just to do so would cost them money in interest that should be going towards a deposit. Likewise taking out store cards, expensive phone contracts and so on.What they need is a way to build credit without losing capital.

The answer? Build credit building opportunities into daily life in a way that doesn’t affect your bank balance.

One way would be to use a credit card once or twice a month for everyday items such as groceries or fuel, then pay this off every month with a direct debit. It doesn’t cost anything, but every month the credit rating agencies can see you’re borrowing – and paying back – money. This does require a small degree of organisation, but if you can make it a habit, your credit rating will quickly build.

But if that option doesn’t appeal, there’s an even simpler way to begin building a credit rating…

Building Credit with Rent

The homeowners’ advantage when it comes to credit building has been the status quo for years. Even though tenants make regular payments in just the same way those paying a mortgage do, this has never been recognised as sufficient for building a credit rating. With the introduction of Credit Builder we’ve changed this status quo and given tenants an opportunity to build their credit rating while still paying rent.

Rent is likely to be the most significant monthly payment that many people make so integrating it with an application that allows it to be recognised as a legitimate credit rating builder is one of the most effective ways to improve a credit score. Unlike loans or high-interest credit cards, building your credit rating by paying your rent doesn’t risk costing you any extra; it’s a simple ‘hack’ to integrate credit building into your everyday life.

Pay your rent using our Credit Builder application and every payment you make is recorded by our partner Experian (one of the big 3 credit referencing agencies). It’s free to use, it’s simple to set up and once you’re using it you don’t have to give it a second thought. Your credit rating, and all the benefits that come with it, just keep growing in the background.

Try Credit Builder now and start building your credit rating.