How to improve a bad credit rating
Monday, June 8th, 2009 Subscribe To Our Feed
Through building up a good credit rating, you will opening up the door to a whole range of financial possibilities. A good credit history will help you to be approved for a range of financial products, such as mortgages, credit cards and loans. On the flip-side, these finance options are likely to be less available to those that have a bad credit rating.
This article provides a number of steps that can be taken in order to improve your credit rating.
It is very common for successful people with high paid jobs and a little or no debt to carry a tarnished credit rating with them
A bad credit rating is usually given as a result of late payment for bills such as credit card or utility bills; a Default or County Court Judgement (CCJ) put against your name.
Depending on how bad your situation is, repairing your credit score can be challenging. If find that your bad rating is due to a mistake on your credit file, or as a result of late payments, it should be relatively easy to fix.
Unfortunately for those with a Default of CCJ, it can be very difficult to sort out, but there is still hope. A Default will remain against your name for 6 years and is usually the result of failure to keep up to date with payments such as loans, and ignoring correspondence from the lender regarding the payments. This is very important, and in some cases can affect you if you require any kind of banking products, even a bank account.
There are 3 significant parts that make up your credit file:
- Personal details (name, date of birth, address etc.)
- Details of any financial products you have that involve credit, such as mortgages, credit cards, loans, phone contracts, bank accounts etc.
- Description of your track record, detailing past history of payment records to show whether you always pay your bills on time, or you have had multiple late payments. This is to allow lenders to decide whether or not you can be trusted with credit in the future.
You may be surprised to learn that your assets and income are not taken into account, which makes it possible in some cases for an unemployed person to qualify for a loan, but a successful highly paid person to be refused.
Is is usually due to the fact that the person that is unemployed has a good history of paying off bills on time, but the person that is on a good salary has been unorganised in the past and as a result has missed payments.
Credit ratings are used to provide a base for lenders to read from, allowing them to judge whether or not they trust you to pay off potential credit.
If you lent £50 to a friend after being told you would have it back in a week, and it took 6 weeks, you may think twice before lending to them again - This is similar to a bad credit rating.
Equally if another friend borrowed £50 and paid you back on the day they had said, you would feel confident in lending to them again - This is similar to a good credit rating.
How can you get a good credit score?
You can only ever earn a good credit rating. To do so, you will have to have had some kind of banking product, or regular payment such as utility bills, with the full amount owed paid on time and within the terms stated in the original agreement.
You can only ever earn a bad credit rating, which is usually achieved through being consistently late with payments, or not paying them at all.
In short, your credit rating can be used by lenders to predict whether you are likely to make the required monthly payments in full and on time until the debt is paid off in full.
How to find details of your credit rating
If you would like to find out how good/bad your credit rating is, there are two main credit reporting agencies that can help - Experian and Equifax.
For just £2, either agencies will send you a copy of your credit file. Avoid signing up for the monthly plan if you can, as this can be expensive and is not required by most people.
How to repair a damaged credit rating
The next section assumes that you have a bad credit rating due to either incorrect information, or several late payments.
There are two main steps you can take in order to repair your credit score:
Step One
Upon receiving your file, you must thoroughly check every piece information to ensure that it is correct, for example you may find that your surname has been spelt incorrectly, or a loan you took out in the past is showing the wrong amount.
If you come across anything that looks incorrect, you can have it changed by contacting the agency that provided you with the file using their helpline.
How being registered on Electoral roll can help your score
To recap, potential lenders use your credit file to predict the likelihood of you repaying credit on time and under the agreed terms. They will also look at stability.
Being on the Electoral Roll provides a good sign of stability and you don’t necessarily have to vote to be registered, so if you want to improve your credit rating, get on the phone to your local MPs office or the local Council for the forms and complete them as soon as possible.
Why it can be worth getting a credit file from each agency
Millions of entries and updates are made to credit ratings on a daily basis, so it’s not surprising that mistakes happen. If you find that a piece of information is incorrect with one agency, it is likely to remain incorrect at the other, even after updating it.
It is therefore a good idea to get both credit files from the two agencies, checking them in detail to ensure they are both accurate.
Step Two
Make some changes to your spending habits.
An effective method for showing lenders that you can be trusted with credit is by using your credit card(s) whenever possible, for example, using it to pay for every day spending such as groceries and fuel. This is because no form of credit is required when making payments with these payment types, so no history is logged. The golden rule when using a credit card is to ensure you always pay off your balance on time.
So next time you go to to pay for fuel or your weekly shop, use a credit card.
The theory is that by using your credit card regularly and ensuring the bill is paid on time, you have effectively borrowed money and shown that you can be trusted to pay back this ‘loan’, therefore having a positive effect on your credit rating. Continue with this for between 6 and 12 months and you should see some positive changes in your credit score.
Important – don’t be tempted to begin using your credit card for credit purposes, i.e. getting into debt. If you want to improve your rating then you must use them for this reason only.
What to do if your credit card application is rejected
There are currently several credit cards on the market specifically aimed at people that have a bad credit rating. These cards tend to offer low credit limits (generally around £500) and high rates (around 40%), but this is not a problem, provided you pay off your balance in full without fail within the interest free days provided with the card (usually up to 56 days).
A popular card designed for consumers with bad credit ratings from defaults or CCJs is the Vanquis Credit Card, which offers a credit limit of up to £250, with 39.9% APR on purchases, up to 56 interest free days and online banking facilities. To qualify for this card you don’t need to be a permanent resident of the UK, nor do you need to have a bank account.
It can be beneficial to have two or more credit cards when trying to rebuild your credit score, as this allows you to prove that you are able to manage your credit, without simply getting into debt.
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