Most people will at some point in their lives apply for some form of credit. It might be an application for a credit card, mortgage, personal loan, or even a new mobile phone.
Each time they do, the lender will perform a check on their credit rating in order to better decide whether the individual is a suitable person to lend to. This is a process known as credit scoring.
Having a poor or bad credit rating can seriously limit your ability to borrow. Any County court judgments (CCJ’s), defaulted payments, or bankruptcy orders can all leave a black mark on your credit history, and in turn will make it difficult for you to secure credit in the future.
Most people don’t realise they have a poor credit rating until they apply for credit and get turned down. Ofcourse by this time it is too late, and regularly credit refusals can even make matters worse as the rejection does leave a footprint on your credit file.
In most cases the only credit available to borrowers with poor credit ratings are through the dub-prime market. Sub-prime is an American term that is used to describe borrowers who are of a particularly high-risk.
Individuals with a bad credit rating are usually charged much higher rates of interest which reflects the perceived risk that the individual holds to the lender. Given the current financial situation, borrowing in this market is extremely limited.
There are however a number of steps that be made to help fix a poor a credit rating and hopefully in time will help to avoid the frustration and inconvenience of being refused credit.
Get a copy of your Credit Report
Experian, Equifax, and CallCredit are the three credit reference agencies in the United Kingdom that hold information about every financially active adult.
These credit files combine three key areas of information:
Personal Information
- Your name
- Your partner’s name and details
- Any previous addresses
Electoral Roll Information
- Publicly available information from the electoral roll
- Details of any court judgments
- Details of any bankruptcies
Financial History
Your credit file will contain details of all your current and previous financial accounts, along with information on when you have applied for credit in the past, how much credit you have available, and your history of paying off debt.
How do I get a copy of my Credit Report?
Under the terms of the Consumer Credit Act 1974 you are legally entitled to a copy of your own credit file, at a cost of £2. To receive a copy of your credit report, you will need to contact Experian, Equifax and CallCredit.
All three offer free access to your credit report for a 30-day period, but will often charge you for premium services once this period lapses. The easiest way is to sign up and then promptly cancel your membership before the free period expires.
Alternatively you can request a copy through the post for a one-time fee of £2.
Once you’ve familiarise yourself with your credit report you can start to figure out potential areas that can be improved, and in turn help to improve your overall credit score. Here are a few tips on how to start cleaning up a poor credit history, and make your credit file more appealing to potential lenders.
Tip 1 – Make sure your details are up-to-date
Check you are on the electoral role
A good starting point is to make sure that you are listed on the electoral role. Lenders need to know that the information you submit on your credit applications are correct and accurate before they are willing to offer you any financial services.
It is therefore important that you register and update your local council should you move home. The credit reference agencies tend to update their details using information the electoral role every month, so if you aren’t already registered, doing so should lift your score fairly quickly.
Dispute & Amend incorrect information
It is a good idea to make sure you check your credit report at least once a year to make sure that your details are correct and to make sure no errors have been made. Experian, Equifax, and CallCredit all offer a monitoring service in which they keep an eye on your file for any signs of identity fraud, and then alert you accordingly. You will be charged a subscription fee for this service.
Should you discover any incorrect information when looking through your credit report, the credit reference agency can then flag the specific entry as “disputed” and will consult with the company in question.
If you wish to dispute an entry, the credit reference agencies recommend adding a 200-word ‘Notice of Crrection’ statement to your file if there are details that need explaining. Any future lenders are legally bound to pay attention to these notices
Tip 2 – Prevent missed payments
Just by missing something as simple as your monthly mobile phone bill could have large consequences for your credit rating, and could remain a blot on your credit report for three years.
It is important that you keep on top of your monthly outgoings, and budget accordingly in order to help prevent any missed payments, and there detrimental effect on your credit score.
Tip 3 – Don’t be in a hurry to close active accounts
If you do happen to miss a payment and then decide to close that specific account within a three year period, then the record of the missed payment will stay on your credit file for an additional six years. It is a good idea to try to keep such accounts active until the last missed payment information drops off your file.
Tip 4 – Better to borrow than not
In order to build a good credit rating lenders need to know that you can manage credit responsibly. It is possible that lenders will be hesitant in giving you credit if you already have too much credit on file, and likewise if you have too little they won’t see you as a profitable creditor.
A good credit file in the eyes of lenders, is one that displays a proven history of responsible credit management, which could mean regular and on-time loan repayments, or simply just someone who clears their balance on their credit card every month.
Tip 5 – Avoid rejection ‘footprints’
If you find yourself getting repeatedly rejected for various credit applications then this itself can leave a footprint on your credit history.
The footprint is a mark on your credit file every time it is viewed by a potential lender. The footprint will let you know who exactly is checking your file, but it also gives the lender an idea of how often you are applying for various credit services. If there’s too many footprints on your credit file, then this too can be a worry for lenders.
If you’ve recently had a credit card or loan application refused, then it is a good idea not to immediately apply for more. Instead, it is a good idea to contact the lender that refused your application and ask them to explain why they turned you down. The reasons they give may point to a specific entry on your credit report and will give you a better idea of how to repair the damage.
