Steps to fix bad credit
Many people are completely unaware of their credit score, or even that they have one, until they have an application for credit turned down. And finding out that the decision not to approve your application is largely based on a calculated number just adds insult to injury. But rather than ‘taking your business elsewhere’ and trying another lender – which can actually make matters worse – it’s worth taking the time to understand what credit scores are all about, and what can be done to improve them.
Every lender, whatever kind of financial service they are offering, needs to be satisfied that the customers they are lending to are capable of repaying their debts on time and unlikely to default on their payments. To do this they need to gather information about your financial situation, past and present, so that they can calculate your credit score.
The credit score is calculated by using information from three different sources:
– The information you submit on your application form.
– A credit file supplied by one of the three major credit reference agencies.
– Any previous credit history you might have with the company you are applying to.
Of course, you will already be aware of your past history with the lender and with what you have written on the form, but what about the information on your credit file? This has a big part to play in influencing the decision on whether or not to accept your application. Fortunately, you can request a copy of it from whichever credit reference agency your prospective lender used.
Your credit file contains information that helps a lender assess whether or not you are reliable and can afford to repay your debts. It includes:
– A list of credit accounts, bank accounts and loans, showing whether you have paid your debts on time and in full, as well as any late payments.
– Information on any court judgements for non-payment of debts, bankruptcies or any Individual Voluntary Arrangements (IVAs).
– Information from the electoral roll to make sure you are registered as a voter at your current address.
– A list of individuals who you have financial relationships with, such as joint accounts or joint mortgages. Their credit rating could affect yours.
– A trace of every application that has been made for credit – too many can indicate that you’ve been turned down by others and can have a negative impact on your credit score.
All this information can be kept up to a maximum of six years.
Once you have your credit report, check it to see whether it is accurate. If there is any inaccurate information on there, you can ask the credit reference agency to delete it immediately.
Then make sure you are on the electoral register. To get started, go to https://www.gov.uk/get-on-electoral-register.
If there is an individual you no longer have a financial relationship with, make sure their name no longer appears on the list of financial associates. Close any old joint accounts and inform the credit reference agency accordingly. If you don’t, your credit rating could continue to be affected by anything that individual may do in the future.
Close down all unused credit card accounts and bank accounts. With credit card accounts, you must contact the provider and ask them to do this; simply destroying the card is not enough.
Taking all these actions to amend your credit reference file can have an almost immediate effect on repairing bad credit. But there are other ways of fixing bad credit, too, although they will take slightly longer.
One is, of course, to start paying off your debts in full. Pay as much as you can, and always more than the minimum payment amount.
If you don’t have a credit card, get one and use it, and pay off the balance regularly and in full. It seems strange, but having some credit history is better than no credit history. It means that the credit reference agency can paint a better picture of your creditworthiness.
And finally, space out your credit applications or, better still, wait until your debts are significantly reduced before attempting to apply again. The better your credit rating, the better the deal you’re likely to get in terms of the loan, how long it’s for and the rate of interest you will have to pay.