How to improve your credit rating
Once upon a time, in the days before the credit crunch, the British people enjoyed a credit boom during which lenders dished out loans, credit cards and mortgages to seemingly almost anyone.
However, in today's turbulent times, financial institutions are far more restrained than in previous years. Obtaining credit is no longer a matter of simply applying for it.
Now, lenders are keen to cherry pick the very best applicants for their products – and as a result, many of the market's leading products are reserved primarily for people with excellent credit scores.
The credit rating myth unmasked
In the current climate, the terms 'credit rating', 'credit report', 'credit score' and 'credit history' are hot on everybody's lips – but many of us are unsure of what they actually mean. Here's the truth:
• Your credit score (or 'rating') represents how much risk you pose as a potential customer to a lender.
• This is worked out based on your credit history (how you have used credit in the past).
When you apply for credit, your lender will contact a credit reference agency for your credit report. This report is a record of your credit history and will give the lender an indication of how your accounts have been handled in the past.
Each lender will then use its own formula to calculate your credit score based on the information they receive from your credit report, application form and any past dealings with that company. As each lender calculates your rating differently, it is not uncommon to be turned down by one company and then accepted by another.
It is worth remembering that financial institutions are looking to make a profit. If you always repay your credit card bill in full each month, while you may feel like the perfect, low risk customer, you could well be rejected simply because you won't make the lender any money.
Many people believe there is a credit 'blacklist' of people whose credit scores are so low they should never be allowed to borrow. But contrary to this myth, there is no universal credit rating for any individual, and no such thing as a credit blacklist.
Take Control
The first step to improving your credit rating is to know what you're dealing with. This means regularly checking the information held on you by the UK's three credit referencing agencies: Exprerian, Equifax and Callcredit.
Under the Consumer Credit Act 1974, you have a statutory right to get a basic copy of your file for £2. As this can be a slow process, each agency will also provide you with more detailed information online for a higher fee.
However, you can bag this service for free by taking advantage of the 30 day free trial offered by Credit Expert. You can sign up, check your file and, provided you cancel your direct debit within the 30 day limit, the service will be free.
Once you have your credit report, make sure that all your past debts are listed accurately. If there is anything on your credit report that needs to be updated, you should set the record straight; even a small mistake could mean you are judged unfairly.
If you disagree with anything on your file, write to the agency and request that it is changed. If the agency refuses to amend your file, you are entitled to add a 200 word 'notice of correction,' which will be seen each time your credit history is assessed.
Steer clear of credit repair firms that promise to improve your rating for a fee, as there is nothing they can legally do that you can't already do for free.
How to improve your score
Here are a few hints that could help to improve your credit rating:
• Make sure you are on the electoral register. Financial institutions want to lend to someone who they can track, so ensure you are visible.
• Show evidence of stability. Staying with the same bank and employer for a while and using a land-line number rather than your mobile number on your application form will help with security checks.
• Build a credit history. Lenders want to see you can repay what you owe, which can be a problem if you've never borrowed. You don't need to get into debt to do this; having a mobile phone on a pay monthly tariff could be good starting point.
• Space out your applications for credit. Each time you apply for credit, it leaves a footprint on your file. If lenders see you have made multiple applications in a short space of time, they may think you are in financial difficulty.
• Always pay at the least the minimum monthly repayment (MMR) on your credit card or loan. If you can't, inform your lender. Even though changing your repayment schedule will affect your credit score, it is better than being hit with a county court judgement.
• Cancel unused credit cards and close accounts you don't use. Having access to too much credit can be a problem.
• Be aware that if you are financially linked to someone with a poor credit history, this could damage your own credit rating. If you have split up with a partner with whom you had financial links, write to the credit referencing agencies and ask for a 'notice of disassociation'. This will stop their credit history affecting yours in the future.
Clean up your credit rating
With credit scarce as a result of the current economic crisis, maintaining your credit rating should be at the top of your financial priority list.
The stronger your credit history, the more likely it is you will be able to get affordable credit when you need it. As always, just make sure that you only borrow what you know you can afford to pay back.
**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**
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