How to improve your credit rating
Thursday, 02 September 2010 12:00
A bad credit rating is nothing to be ashamed of. There are many reasons why someone may possess a less-than-sparkling credit score besides by defaulting on credit agreements, for example if they have never taken out a credit card or loan before or have moved address frequently.
Whatever your reasons for registering low on the credit radar, building a decent rating is vital if you want to be approved for certain financial products in the future, including mobile phone contracts, personal loans, car finance and mortgages.
Make no bones about it; credit ratings don't improve dramatically overnight. But by diligently following some simple steps you can build your rating gradually and substantially over time, improving your financial health along the way.
Get a credit building credit card
It's an old conundrum; without a good credit rating it is difficult to obtain a credit card, but without a credit card it is difficult to obtain a good credit rating! Fortunately, the industry has noticed this catch-22 situation and several credit providers offer cards specifically aimed at building the cardholder's credit score.
Although these cards have much higher rates of interest than regular credit cards, the acceptance requirements are much lower, making them far more accessible to people with poor or non-existent credit ratings.
Three of the best cards currently available are the Capital One Progress Card with 29.9% APR typical, which can drop to a lower APR the better a customer you are; the Barclaycard Initial credit card 29.9% APR typical, which allows people with one CCJ or IVA to apply; and the Vanquis Bank Visa credit card 39.9% APR typical.
These cards aren't designed for heavy spending. End up with a balance beyond your means and you will be punished by the sky high interest rates, which could in turn lead to missed payments and a further downgrading of your credit score.
By spending sensibly and paying off the full balance each month, a credit building credit card will boost your rating and make it easier to switch to a card with a better interest rate in the future (if you still need one that is.)
If you are declined for one of these cards, consider applying for the CashPlus prepaid MasterCard and opting into its credit building scheme. The CashPlus Card has a monthly fee of £4.95 and doesn't have a credit facility, but is a good way for people with poor credit ratings to get a foot on the borrowing ladder.
Remember not to keep applying for credit cards if you are rejected. Applications for credit appear on your credit report and more than one of these within a small period of time does NOT look good.
Leave at least six months before applying for credit again if you are rejected.
Change your spending habits
If your poor credit rating is a result of spending beyond your means and falling behind on repayments, then you will have to face facts and fundamentally change your spending habits.
Late payments, high credit card balances, defaulting on loans and the like all hurt your credit rating significantly, but these can be limited just by fine-tuning your attitude toward credit.
Don't see credit as a means of funding a lifestyle; use it only sparingly for essentials, not holidays, cars and nights out on the town.
Try not to put everyday purchases like lunch or transport on credit as small payments can add up without you realising. Use your card only once a week, for the weekly shop for example, or for one off essential costs like car repairs, and set yourself a limit.
Spend only what you can afford to pay off at the end of the month, or at least a significant chunk of it. It's no good merely meeting the minimum payment each month as this will only put you further into debt and harm your credit score.
Paying as much as you can off your balance each month, and on time, is arguably the fastest way to improve a credit rating.
Check your credit report for inconsistencies or errors
Bad credit ratings aren't always a result of reckless spending or lack of a credit history.
Sometimes, a credit report can be doing all the damage for you via incorrect addresses, misspelled names, incomplete information or just plain factual errors.
A common problem is varying addresses for people who live in flats. For example, if you have applied for credit and gave your address as 1st Floor Flat, 76 Something Street, but the address for an existing agreement is Flat B, 76 Something Street, then this could potentially harm your application and affect your credit rating in the process.
If you are a student and unlikely to stay at the same address for long, then, if possible, use your parents' address when opening bank accounts, mobile phone contracts etc.
Another thing to look out for is where you are registered on the electoral roll. If you have changed address recently but are still on the electoral roll for your previous address then this could also affect your chances of being approved for credit.
Double-check your report and ensure that it is up-to-date and accurate before applying for any form of credit. Viewing your report doesn't affect your rating, but a simple mistake can cause serious damage.
There are three main companies which keep credit reports on people in the UK, Experian, Equifax and Callcredit. It costs £2 to order your statutory report with each respective company.
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