Easy ways to boost your credit rating
If you ever want to borrow money, whether it's in the form of a mortgage or a credit card, the health of your credit rating will be a key factor in how much you can borrow, what rate you can borrow at and whether you can borrow at all.
Yet, most of us pay very little attention to our credit reports. But you should, as even a couple of small discrepancies can significantly decrease your chances of getting credit - in particular, at a good rate. To help you on your way, here are 10 ways to boost your credit rating.
1. Get hold of your credit report
The first thing you need to do is to get hold of your credit report. You can access it via any of the three main credit agencies in the UK: Experian, Call Credit and Equifax. By law, all the credit agencies are required to provide you with a one-off copy for just £2 so don't be conned into paying more.
Check your report on a regular basis – say at least once every 18 months – and always in plenty of time before you apply for credit.
2. Look for mistakes
Once you have your report, go through it with a fine-toothed comb to make sure there are no mistakes. "Worryingly, there are over 500 recorded cases a year in which lenders have incorrectly recorded information on people's credit files," says Steve Rees, managing director of debt management company Vincent Bond & Co.
Even a minor mistake could hinder your chances of getting credit so make sure all your details are correct and that all your borrowings are on record. If there is a discrepancy, contact the three main credit agencies to get it corrected as well as the business that the loan was with.
3. Check for old addresses
Make sure that any of your old addresses are on your credit report and are spelt correctly so that old loans and credit cards are included in your credit report.
It may seem counterintuitive to want evidence of previous debts on your record, but lenders like to see past history of how you've handled previous loans – so the more examples of you successfully repaying a debt the more chance you stand of securing credit.
4. Check for hidden debts
Making sure all your addresses are correct can also prevent you from building up 'hidden debts' – debts you aren't aware exist. "
These hidden debts can swiftly stack up, leaving many consumers owing more than they realise and damaging their credit score," says Rees. These include things such as forgotten direct debits on unused accounts that push you into an overdraft or old mobile phone contracts.
Provided all your contact details, both old and new, are correct your credit report should reveal these debts for you so you can take steps to sort them out.
5. Show your stability
Lenders like to lend to solid and reliable members of the community – the kind of people who aren't going to cut and run, never to be seen again once they've got hold of the bank's money. The best way to make yourself look like a good bet is to show you've lived at one address for a long time or have a lengthy relationship with one bank. But even just getting your name on the electoral roll and getting a fixed-line telephone number will help.
6. Cancel unused credit cards, debts and accounts
When assessing how much money they are prepared to lend to you, banks and loan companies look at how much credit you already have available. This will include credit card limits, overdrafts and loans. So if you have any unused credit cards cancel them. Also, if you have a high credit card or overdraft limit that you never use, get the limit reduced.
7. Get a credit card
Creating a debt may seem an odd way of improving your credit rating but, again, it helps show lenders that you are a reliable borrower. So, if you have very little – or bad – credit history getting a credit card and managing it sensibly will improve your credit rating. This means spending only what you can afford on the card and paying off the balance in full and on time every month.
8. Be careful who you link your finances to
"Marrying someone will not link up your credit reports but applying for joint credit will," says James Jones, head of consumer affairs at Experian. When you apply for a joint credit card, loan or open a joint bank account you and the person you apply with become connected via your credit reports. This means you are marked down as having a 'financial association', meaning the way one of you manages your finances may affect the other.
For example, if one of you does have a bad credit rating it could affect both of you, so be very careful who you open joint credit with.
If you wish to end a financial association with someone you'll need to close any joint accounts, cards or loans (you both have to do it together) then contact the credit reference agencies (you can do this on your own) to get them to remove the financial association from your file.
9. Don't make lots of applications for credit
Every time you apply for credit the lender will check your credit report. While this isn't clearly marked on your report for you to see, a 'footprint' – a sign that a credit check has taken place – is left behind which other prospective lenders can see. So if you apply for lots of credit cards or loans at the same time you run the risk of appearing "desperate" or "the victim of fraud", says Jones, which won't make lenders keen to lend to you.
Try to space out your applications, and if you've been turned down for credit ask why rather than just applying elsewhere as repeated applications could just make the situation worse.
10. Never miss a payment
This is the golden rule of credit references, if you ignore everything else in this article take heed of this. Never miss payments, as it will damage your rating. If you know you are going to struggle to meet a payment contact the company as soon as possible and try to come to an arrangement rather than simply defaulting.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
Your credit score is a three-digit number (ranging from a low of 300 to a high of 850) calculated from the information in your credit report. Your credit score enables lenders to determine how much of a credit risk you are. Basically, a low credit score indicates you present a higher risk of defaulting on your debt obligations than someone with a high score. If you have a low credit score, any products you successfully apply for will carry a higher rate of interest commensurate with this risk.
A report containing detailed information on a person’s credit history, a record of an individual’s (or company’s) past borrowing and repaying, including information about late payments and bankruptcy. It also includes all applications a person has made for financial products and whether they were rejected or accepted. Your credit report can be obtained by prospective lenders to determine your creditworthiness.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.