Credit cards and credit ratings
Being self-employed has many advantages, the freedom to choose how much you want to work and earn are just a couple. However, when it comes to applying for mortgages and any other lending, it’s absolutely essential you plan ahead with your finances and how you manage them.
A few years ago I embarked upon my journey to become more mortgage-friendly as a self employed person. I’d learned various tactics from property courses I’d attended and knew that I needed to play the long game if banks were ever going to see me as a good applicant for a mortgage.
It seems obvious now, but banks want to lend money to those they know will be able to pay their debt back. Unlike credit cards and other small-time lending solutions, mortgage lenders need assurance that their loan will be repaid on time and that the recipient of the loan has the means to repay it. This is due to the size of most mortgages and the term over which it will be repaid, whereas credit cards are handed out pretty easily because it is in the bank’s interest for the debt not to be repaid on time because of the extortionate interest rates on these cards.
However this proves a tricky situation for the self-employed because in order for you to get a mortgage you need to prove you’re a good borrower of money. I hadn’t really considered my credit score before, but knew that in order to be a good candidate for a mortgage, I needed to borrow money to prove to lenders that I demonstrated the ability to service smaller chunks of cash. It’s a chicken and egg scenario but one that can be crafted to work in your favour if you stick to a few first principles.
The quickest and easiest way of borrowing money and thereby increasing your credit score is through credit cards. It does however take some discipline and having the right systems set up to maximise your chances of success. There are several fantastic by-product of utilising credit cards for purchases. Firstly you have more protection as a consumer and credit cards tend to offer more protection when you need a refund or fall victim to a scammer. Secondly, you can accrue points or cashback for every pound spent. These points can be used to purchase flights, hotels, upgrades or in many other shopping channels in the future. If you choose to claim the cashback instead, often this cashback can pay for the cost of the credit card itself (not all credit cards have an annual fee but this is worth checking before you sign up).
Finally, you can use balance transfers to ‘bounce’ credit card balances from one card to another, benefitting from clearing your balance on one card, getting points for your spending, and often only paying whatever balance transfer fee is applicable. You’ll get an interest-free period where you only pay the minimum amount (you will need to set this up in advance), then simply ensure that the balance is paid off in full during this period to avoid massive fees once the interest-free period comes to an end.
I have used credit cards now for many years and it has bumped up my credit score no end. Here are my golden rules for credit cards:
- Always, always, always set up the credit card to be paid in full each month. If you’re going to be balance transferring and bouncing balances over, ensure that at the very least you’re set up to pay the minimum amount each month.
- Ensure you are aware of any annual fees, introductory offers before signing up and ensure you’ve made a note and reminders of any important cancellation dates for each card.
Here are some of the cards I currently use:
Capital On Tap
For my business I use the Capital On Tap Rewards Visa credit card. It costs £99 a year but I accrue one point for every £1 of card spend. I can choose to claim these points as Avios points that I can then use towards flights, hotels or other shopping, or I can redeem these points as cash. The COT app is excellent and extremely easy to use, as is their desktop site. I don’t get any charges for overseas use and I can get up to 20 cards to use with the same account free of charge. Click here to find out more.
*This website does not provide financial advice. The information on the tomshooter.co.uk website has been collated and published with the utmost care by the author. That being said, the content on this website does not constitute any form of independent professional financial advice, recommendation, representation, endorsement or arrangement by me and is not intended to be relied upon by you in making (or not making) a specific investment or any other decision. The educational resources published on this website are intended to be educational or journalistic in nature. Information is drawn from personal experiences only. Given that the impact of any information expressed on this website can vary widely based on your particular circumstances, you should always carry out your own research into the investment that is of interest to you. This may include seeking out independent professional financial advice from a qualified individual, which will be tailored to your circumstances. tomshooter.co.uk is not a replacement for such advice. I do not purport to offer such a service, and I am not authorised by the Financial Conduct Authority to do so*