Through building up a good credit rating, you will opening up the door to a whole range of financial possibilities. Whether you’re looking for a credit card, loan, mortgage etc, you should have no problem qualifying if you have a good credit history. On the flip-side, these finance options are likely to be less available to those that have a bad credit rating.
This article provides steps and measures 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 extremely serious, as it can affect whether you’re considered for a whole range of banking products, from credit cards, to current accounts.
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.
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 can you get a good credit rating?
You must earn a good credit rating to be given one. To do so, you will need to have had some kind of financial product in the past, or even a regular payment such as utility bills that was always paid off on or before the billing date 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 part of this article assumes that you have built up a bad credit score due to a string of late payments or incorrect information stored on your file.
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 do find anything that isn’t correct, you can have them amended by contacting the agency that supplied you with the file.
Why being registered on the Electoral roll is important for 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 several credit cards designed specifically for those that have a bad credit score. 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.Online banking, 9% APR on purchases and up to 56 days interest free on purchases. 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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