How to repair your credit rating
My daughter recently asked if I could help out with one of her friends, Claire. Claire is 26, has been employed for 8 years and is really desperate to get control of her credit card debt.
She‘s been making the minimum payments, but the outstanding balance of £2,100 has hardly reduced as the interest rate is 28%.
My advice? Move the balance to a 0% balance transfer card - not difficult really and makes good sense as long as you don’t keep spending on it or drawing cash.
“I tried that a few weeks ago and got turned down, the same thing happened about a month ago, no-one wants me!” moaned Claire.
Unfortunately Claire is one of the whopping 25,000 people who, according to Credit Action, are turned down for credit each day. (Figures from December 2009.)
Let’s get one thing clear; entitlement to credit is not an automatic right. However, while there’s no overnight fix, as lenders want to minimise their risk, there’s a lot you can do to help improve your chances of getting credit.
Before attempting to rebuild your credit you should be confident of your financial situation and, unless you are moving to consolidate or move credit, borrowing further when you are in a difficult situation is rarely a good idea.
There is a general rule of thumb that says if you are unable to obtain credit, two years of ‘good behaviour’ should enable you to then get ‘simple’ credit (mobile phones, utilities, satellite TV etc) again. Good behaviour would generally mean maintaining payments on existing credit arrangements and settling defaults and County Court Judgements, CCJs.
If you can see no reason for being repeatedly declined credit then you should look at your credit file immediately. This can be done online for as little as £2 or by post.
What if the information on my file is incorrect?
If the information is incorrect you can write to the agency asking it to either remove or change the entry that you think is wrong. Within 28 days of receiving your letter the agency should tell you that it has either removed or changed the entry or taken no action.
Notice of Correction
If you are unhappy with the response or would like an explanation for the information on your file you can send a notice of correction. This is a statement of up to 200 words that will be added to your file as long as it isn’t defamatory, frivolous or incorrect. Again the agencies have 28 days to respond.
If the agency still takes no action, resend the notice of correction. If information is amended the agency must send details to any lender who has enquired in the last 6 months.
If an agency declines your notice of correction it must refer you to the Information Commissioner.
What can you do if you are refused credit?
The lender is under no obligation to give you the reasons you are refused. However, for loan applications of up to £15,000, individuals have the right to know which agency supplied the credit information, provided you request this information within 28 days of the initial application.
The three key steps to getting back on the lending ladder
1. Repair your Credit File
2. Maintain & Reduce existing credit
3. Apply for the right types of new credit
Once you understand how you’re going to ‘tidy up’ your past financial situations you should then look at your current situation. You need to understand how lenders look at your file, what counts for you, and what counts against.
- Have associations (other family names) on your file that aren’t helping? (Claire, possibly with other tenants.)
- Have lots of small loans and balances on credit cards? (Claire, yes.)
- Have repeated applications for further credit? (Claire, yes.)
- Maintaining regular payments? (Claire, sort of.)
- On the electoral role? (Claire, no.)
- Making lots of applications for credit? (Claire, yes.)
What hasn’t helped Claire is that every year she moves into different rented accommodation so there is yet another new address on her file. The previous tenants of this rented property may have had credit problems, which could impact on Claire’s application.
Also, depending on when she moves, she may have been too late to go on next year’s electoral roll, which is another source of information used by credit reference agencies. Furthermore the repeated application for credit when her credit file is untidy virtually guarantees failure.
So don’t keep applying for credit hoping someone will give in to you. The more you apply the worse it will get. Work hard at repairing your file and let the lenders give credit where credit is due.
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.
Moving money from one account to another, whether switching bank accounts or more likely transferring the outstanding balance on your credit card to another card that charges a lower – or 0% – rate of interest. Some card providers may charge a transfer fee that can be a percentage of the balance transferred.