Have you been refused a credit card, loan or mortgage? If so, you probably have a poor credit rating. In recent times banks and credit card companies have become much more reluctant to lend to people they consider ‘high risk'. That means having a poor credit rating can have a real impact on how you live your life. For example, you could find yourself struggling to make payments to a credit card which has increased its APR (annual percentage rate) but unable to transfer your debt to a new card or personal loan because your application is refused.
Even if you have always managed your money well, your credit rating could still be letting you down. That's because lenders may not have enough information or positive credit history to go on and therefore class you as high risk.
Luckily, there are a number of easy steps you can take to boost your credit rating and get out of this incredibly frustrating situation.
How credit scores work
When you apply for credit with a company, it will (with your consent) check your credit score through a credit reference agency. The three main ones are Experian (www.experian.co.uk ), Equifax (www.equifax.co.uk ) and Call Credit (www.callcredit.co.uk ).
These companies hold your credit report, which includes details of the electoral roll (a list of the names of all people registered at an address who are entitled to vote), County Court Judgments or CCJ's (a ruling for an unpaid debt issued by a County Court), bankruptcies, fraud data (including identity fraud, if someone has stolen your ID and committed fraud) your current and past credit commitments and they also show if you have missed or defaulted on any payments over the last six years.
As your credit report shows how you have repaid credit in the past, lenders will take it as an indication of how you will repay credit in the future.
If you don't score highly, lenders may:
- Refuse to give you a loan
- Offer to lend you a smaller amount
- Charge you a higher rate of interest.
The better your credit history, the wider the range of credit products you'll have access to and the better the rates. A poor credit history will limit your choice and usually means you'll have to borrow at higher rates. The good news is your credit history can be improved over time.
So why can't I get credit?
There are two reasons why your credit rating might be poor:
1. You have little or no credit history
If you are in this situation, you might be recently divorced or a homemaker, who is or has been, wholly or partially, financially dependent on your partner. You might also be someone who has not applied for much credit in the past, such as credit cards, mortgages or loans.
Ironically, this supposedly ‘high-risk' category also includes people who have always paid their bills on time and have been financially independent enough in the past to not need any credit. This is because banks' main concern is making profits - and someone who pays their bills off in full every month is far from being their perfect customer.
2. You have a credit history, but it is poor
If you are in this situation, you might be affected by previously bad credit, due to late payments, bills in arrears, County Court Judgments (CCJ's), bankruptcy or Individual Voluntary Arrangements (IVAs). Read more about how to clear your debts here
Your rating may also be badly affected if your partner, or ex-partner, has a bad credit rating and is, or was, linked to you financially (e.g. joint accounts), which means this will affect your rating too. Therefore, if you split up with someone you have joint finances with, it may help your credit rating if you separate your accounts as soon as possible - you can also write to the credit reference agencies and ask for a notice of 'disassociation'.
Finally, many lenders like to see proof of a regular income, though the importance of this differs for each lender. Therefore, if you are a homemaker, part-time worker, temporarily unemployed, self-employed or have an irregular income, you might also find it hard to obtain credit.
10 steps to improve your credit scores
1. Register on the electoral roll
Many companies use the electoral roll for verification purposes in order to combat identity fraud. To register on the electoral roll you will generally need to complete a voter registration form and return it to your local authority. It is vital you do this every time you move house. Find out more about the electoral roll here
2. Stop applying for credit you won't get
Every application for credit leaves a ‘foot print' search on your credit report, immediately visible to other lenders. If you have applied and been rejected several times, your credit history may be getting worse and worse. Therefore, think carefully about whether you're likely to be approved for a loan or credit card before you apply and check your credit
rating first so you can start to improve it and avoid getting rejected again.
3. Check your credit report
You can apply for a copy of your credit report to the three main credit references agencies used by lenders. You may be able to sign up for a free trial period to see your credit report. Click here to see how: www.moneysavingexpert.com/loans/credit-rating-credit-score
Your credit report will show you the areas that you can improve on and also means you can check for any errors and get them changed. Even a simple mistake such as a wrong present or past address can lead to you being judged on someone else's credit history. If you do spot a mistake, write to the agency you obtained your report from and request that detail be changed.
4. Create some positive credit history
Whether you have no credit history, or just a poor rating, you can start to turn things around by showing you can manage credit responsibly. There are a number of easy steps you can take to do this:
- Put bills in your name (where possible) and pay them by direct debit.
- Open a higher interest credit card, for which you are more likely to be accepted. Make sure you manage it properly to help rebuild your credit rating. This means repaying every month in full, spending a little each month for six to twelve months. For most credit cards, this method will only work if you just use your credit card for purchases. This is a high-risk strategy and it's vital you make your payments on time and stay within your credit limit, otherwise the only result will be to make your credit rating and your financial situation worse - the opposite of what you're trying to achieve.
- Open a couple of store cards. This is another high-risk strategy for improving your credit score. Store cards are generally easier to get than credit cards, but the APR is often very high. If you ALWAYS pay them off in full every month, you have another way to show you can handle your finances responsibly. Don't use this method if you are bad at managing your finances as missing payments on store cards will have a negative impact on your credit rating.
5. Pay your bills by direct debit
This ensures you can't forget to make your payments on time, which is important because every missed payment will show up on your credit report and have a negative impact on your credit rating. But make sure you have enough funds in the account you have set up the direct debit from, as letting that account go into unarranged overdraft when your direct debit is paid out will have the opposite effect on your credit rating!
6. Close down old accounts and cards
Having too much credit available to you may have a negative impact on your credit rating and lenders look at the total amount available to you, not just what you owe. To avoid this, close any cards or accounts that you are no longer using and only leave open the active ones.
7. Check County Court Judgments (CCJs)
This only applies for those with one or more CCJs. Unless you pay the full amount of the County Court Judgement within one month, your CCJ will be recorded in the Register of County Court Judgements for six years. Banks, building societies and loan companies use the registered information to decide to give you credit.
Be very wary of companies that charge for ‘credit repair' services that claim to help you get CCJs taken off your record. Get free, independent advice first from www.nationaldebtline.co.uk or Consumer Credit Counselling Service www.ccccs.co.uk .
8. Notice of Correction
Unfortunately, sometimes a credit reference agency may refuse to amend a mistake you have found on your file. If this happens, you're entitled to add your own comments as a a 'notice of correction'. You may also use this to indicate a reason for getting behind on payments due to a change of circumstance in your life, such as divorce or redundancy. Be concise and factual.
Having a Notice of Correction on your report means your application for credit may take longer as the lender will be obliged under the Guide to Credit Scoring to read any Notices of Correction. Therefore, think carefully before you request to have one added to your report.
9. Curb your card spending
This is the most obvious step of all: try to minimise any debt on your cards. As a rule of thumb, you should try to keep the debt on a card under 30% of your credit limit.
10. Time your applications wisely
Applying for lots of credit in a short space of time and being rejected is not good for your credit rating. You can try leaving between 3 and 6 months between applications to help repair your credit rating, but it may take longer. Things such as mobile phone contracts and car insurance can also count towards this.
For more information on improving your credit scores,