How to improve a bad credit rating
If you can build up a good credit rating, it will naturally open up your financial options. Whether you’re applying for a mortgage, loan, credit card or bank account, a good credit history will help you to get approved. On the flip-side, these finance options are likely to be less available to those that have a bad credit rating.
This article offers a range of techniques that can be employed to improve your credit score.
Many people with successful jobs earning high salarys and with little or no debts often have bad credit ratings
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 the reason behind your bad rating is down to incorrect information or because of late payments, it should be relatively easy to improve.
Unfortunately it can be very difficult to sort out for those with a Default of CCJ, but there is still hope. A Default is usually applied as a result of payments not being made on time, or ignoring correspondence from the lender regarding the payments, and will remain against your name for 6 years. 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.
It may surprise you to learn that neither your income nor your assets are taken into consideration, which effectively means that somebody without a job could qualify for a loan, while a successful businessman on a high wage could be refused.
This will generally fall down to the fact that the unemployed person has a good track record of paying bills on time, whereas the highly paid person misses payments simply through not being organised.
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 to get a good credit rating?
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.
The two most effective methods for improving your credit rating are:
Step One
When you reveive your credit file, you must check over it thoroughly to make sure the information is correct, such as spelling mistakes or incorrect figures.
It is possible that some of your information is incorrect, so check your file thoroughly and if you do spot anything that looks wrong, contact the agency that provided the file and have these errors amended.
How being registered on Electoral roll can help your score
To recap, your credit file is used by any potential lenders as a guide to how trust-worthy you are when it comes to credit, and whether you are likely to repay the loan 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
Each day, millions of credit ratings are updates, so errors are commonly made. 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.
A good way of proving to a lender that you can manage your payments is by using your credit card to pay for monthly and everyday expenses that you would usually cover using cash or a debit card. The reason for this is that these methods of payment don’t require any form of credit, so there is no form history stored for this type of transaction. 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 to do this for 6 to 12 months and you should see a significant change in your credit rating.
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 now a whole range of credit cards, each designed to corner a section of the market, even those with 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 may be a good idea to apply for more than one credit card when attempting to improve your credit rating, as this gives you the chance to further prove yourself and show that you can be trusted to manage your credit.