Repair your credit rating
New credit card rules introduced on 1 January 2009 could make it harder for people to take out interest free cards unless they have a good credit history.
The new rules mean card providers now have to give 30 days notice before interest rates can be increased and struggling borrowers must be given breathing space to get their debt under control.
Although the new rules have been welcomed by consumer watchdogs for providing people with better protection from sudden price increases, there are concerns that new borrowers will suffer.
Ricky Bruce, financial researcher at data provider Moneyfacts, explains: “There is no such thing as a free lunch and in the current climate it tends to be the people who have done nothing wrong that pay for everyone else. Credit card providers could put up rates on deals for new customers or increase fees.”
Lenders use your credit report to judge your risk level before they decide whether to lend you money or not. The information on your report is used to give you a rating, which determines whether you are eligable for credit and how much it will cost you. Only those with the best ratings will get the best deal.
You do, however, have the right to see your report to ensure you get the credit you deserve. Checking the information held about you also highlights any mistakes or fraudulent activity, such as identity theft.
Your credit report provides banks with public information about you, such as your address as well as private information about your different credit agreements. These could be mortgages, loans or credit cards. Your report includes the balance, credit limit and payment history of all your outstanding accounts, as well as settled ones that are less than six years old.
So, whether you want to switch to a more competitive credit card, find a cheaper loan or move onto a tracker mortgage, ensuring your credit report is a good as it can be is essential.
1. Get your report
A quick internet search will reveal dozens of companies that offer people their credit report, but the three most popular are Experian, Equifax and CallCredit.
The information these firms provide is likely to be pretty much the same. Because lenders use these three firms to make their credit ratings, you are more likely to spot any suspicious activity on your file.
By law all credit agencies are required to provide you with a one-off copy of your credit report for £2. However, you can also purchase additional products that allow you unlimited viewings of your rating online.
* Experian offers people a 30-day free trial of CreditExpert, which allows you unlimited access to your report online.
* Equifax charges £11.95 for a copy of your report.
* CallCredit charges £9.95 for a one-off online copy of your report, or £8.95 for unlimited access to quarterly updates.
When you apply for a credit report make sure you are able to provide all of your addresses for the past six years. You will also need to supply your date of birth.
Because the information in a credit report is private you are not able to apply to see the report of anyone else.
Credit agencies will carry out an authorisation check on applications to see credit reports and may ask for additional ID if they are not satisfied you are who you say you are. While this may seem annoying, it is designed to stop fraudsters trying to access your personal details.
2. Checking your report
Your ability to borrow (and the price you pay) is determined by your credit report, so it's worth checking it carefully.
You report will reveal both public and private information. The public information is from the electoral roll including your name and where you are registered to vote. If the address shown is not your current address, perhaps because you have recently moved, you need to ask your local authority to add your name to the electoral roll at your new address.
Your credit report will also include any aliases you have.
Your private information includes details of any financial links you have to other individuals, such as joint accounts and joint credit applications. This will detail the name of the individual, the name of the organization that created the link and when the link was set up.
If you have had a County Court judgment in the last six years then this will appear on your credit report. If you pay a CCJ within one month it will stay on your record for six years but will be shown as settled. Bankruptcy orders will also appear on your report for at least six years even if you are discharged. Individual voluntary arrangements (IVAs) are also shown for six years.
Because lenders in the UK share information about their customers with each other, all your financial credit agreements will be shown on your report. Your credit report outlines all your credit agreements and also gives each account a status code that shows how you have managed your repayments.
For example, a 0 indicates that your payments are up to date while a 4 shows payments are four months late. The letter D indicates the account is not being used while a U is displayed when a credit agreement is new and the information is not yet available.
As well as active accounts, all credit agreements you have had within the last six years will be displayed on your report. If the account is settled and you made all the repayments on time then this will be recorded. But if an account was in default because a payment was late then the date this happened and the amount outstanding will be included.
3. If you spot a mistake...
If you spot a mistake or suspicious activity on your credit report then the first thing to do is get in contact with the agency that sold it to you. They will be able to investigate the matter and find out whether you have been the victim of ID theft or a bank’s mistake.
Peter Brooker, public affairs director at Experian, says people are often able to nip any ID theft in the bud by checking their credit report regularly. But he adds: “Often people are surprised by the information, because they might not recognise the name of a financial institution. For example, if you have a store card then the bank who is lending the money will be listed not the shop.”
4. Start making repairs to your credit record
If you have had problems making repayments and these are on your credit report then it’s hard to know how it will impact you. In the UK lenders have their own criteria for making lending decisions, which is often confidential.
However, if you know you’ve had problems in the past then there are some steps you can take to clean up your report. Paying off your credit agreements will improve your profile, as will limiting any new debt.
Mel Mitchley, director of industry relations at Callcredit, says: "Many people miss repayments not because they can't afford it but because they forget. Setting up direct debits is a great way to minimise the risk."
Also, just making sure you are on the electoral role will boost your rating.
The credit reports of people who you share credit agreements with can also impact your rating. Neil Munroe, director of external affairs at Equifax, says: "Lenders have the right to see the credit reports of people who you are financially linked to and may take this into account."
A quirk of lenders is that they are more confident in lending to people who have a history of borrowing and repaying debt on time. So if you have never had a credit agreement then taking one out and repaying it in full and on time will improve your rating.
If you have been turned down for a loan or other credit agreement then you have the right to know why. Ask the lender for details of your application as this may highlight any mistakes or issues with your report.
Your credit repot also allows you the opportunity to get your point of view across to lenders. Munroe says: "People can include a statement on their report which explains why they missed a payment which lenders have to read. They don't have to take it into account, but at least this gives you the chance to tell your side of the story."
5. Don't apply for credit too often
When a lender makes a credit check on you it leaves a footprint on your credit report – literally, a sign that a credit check has been done. This can be a problem if you are shopping around for credit, because multiple searches can actually damage your rating.
Munroe says: "If you are turned down for credit then don't apply to other lenders as too many searches within a short space of time impacts your rating. Instead, take some time to improve your rating by paying off debt. This will raise your chances of getting credit in the future."
Also remember that a bank cannot run a credit check on your without your permission, so if you notice any footprints that shouldn’t be there you are entitled to complain to the company in question. Banks should also carry out “quotation searches” when the variable rate is determined by your rating and these do not leave a footprint.
And when you check your credit report you will not leave any footprint. This means you can check your report as many times as you like, to protect against ID theft, without running the risk of ruining your rating.
With a tracker mortgage, the interest you pay is an agreed percentage above the Bank of England’s base rate. As the base rate rises and falls, your tracker will track these changes, and so rise and fall accordingly. If your tracker mortgage is Bank of England base rate +1% and the base rate is 5.75%, you will be paying 6.75%. Tracker rates are lower than lender’s standard variable rate (SVR) and as they are simple products for lenders to design, they usually come with lower fees than other mortgage schemes.
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.
A County Court Judgement is a legally issued strike by a lender against a person who has failed to keep to the terms of a credit agreement, usually by habitually failing to make the payments on a loan, credit card or mortgage. A CCJ will appear on a person’s credit record for six years and will certainly affect future applications for credit.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.
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.