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how to improve your credit rating

By Barry Cashin

Today's financial climate has seen more dramatic change in the past few months than at any time in the past fifty years. With mortgages and loans becoming increasingly hard to obtain in the current credit squeeze, now more than ever, it's important to have an immaculate credit rating.

  • What is a credit rating?What is a credit rating?

    Each time you apply for a loan, a credit card or to open up a bank account, a lender 'scores' you by referring to one of three main UK credit reference agencies - Experian, Equifax and Callcredit - to check on your previous financial history. These agencies (all commercial companies) hold information about you compiled from various sources including the electoral roll, the County Court and other financial institutions. The type of data held will typically be about your previous or existing loans, mortgages, bills and credit cards and how well you have managed your debt. The report compiled by the credit reference agency provides a snapshot of your credit history, aiding the lender in making a decision about whether to approve your application for credit.

    The impact of a bad credit rating

    If you have any previous County Court judgments for a previous debt, a poor repayment record for a mortgage, loan etc, have been repossessed or become bankrupt in the past, or are guilty of some other financial misdemeanour, it is likely that the information held about you will be negative. If it is, the high likelihood is that you will be refused credit by the financial institution/s you are seeking credit from. The information held about you is correctable, but can impact on your creditworthiness by staying on your file for a period of up to six years.

    If you are refused creditIf you are refused credit

    If you are refused credit by a lender, you have a right under the Data Protection Act to ask why, and the lender has an obligation to tell you. There are several reasons why a lender may refuse credit in addition to your having a poor credit rating. For example, you may have too many debts, loans or credit card accounts to pass the lender's credit scoring check, or you may just not satisfy the lender's own credit criteria.

    If the decision was based upon an adverse credit report held by a credit reference agency, the lender should tell you the name and address of the agency they used.

    How to find out your credit rating

    Obtaining a copy of the information held about you by the credit reference agency is a fairly simple and straightforward process.

    • 1. Find out which agency the lender used (either Experian, Equifax or Callcredit)
    • 2. Contact the agency and ask them for a copy of your credit file. This usually costs a nominal fee of £2 and you have a statutory right to this information.
    • 3. Once you receive the report, check it over and if you see any glaring errors, write to the credit reference agency (and if necessary to the offending institution who provided the original data) asking the agency to remove the error. If they will not remove it, you should ask them to place a 'note of correction' on your file. This alone will not restore your credit rating to perfect status but any such note will be seen by organisations that you may apply to for credit in the future, and can be taken into account when making a lending decision.

    Simple steps to improve or repair your credit rating

    If you have a poor credit rating, do not fear that all is lost. Although it may take time to repair - perhaps a year or two with good credit practice by yourself or six years if you have previously been made bankrupt - you can return your credit rating to good health eventually.

    There are a number of additional steps you can take to repair your credit rating:

    • Make sure you are correctly listed on the Electoral Register. For more up to date registration details (Electoral Registers are compiled annually), contact your local authority who may have a 'rolling register' for people who have recently moved.
    • Ensure that you always pay your bills, particularly mortgages, loans, utilities and credit cards on time. This applies to anyone else living at your address who may be financially associated with you, for example a partner with whom you share a joint account or a son or daughter for whom you may be guarantor for a loan. If you pay all your bills by monthly Direct Debit, this should eliminate the worry of settling debts on time.
    • Cancel all old, unused credit card accounts. In today's credit shuffling environment, many people frequently switch cards but fail to cancel old accounts. If you do not do this, the open account still stays on your file which could lead a lender to think, erroneously, that you have multiple credit cards and therefore a significant debt.
    • If you are refused credit from one lender, credit or financial institution, do not make further multiple credit applications as these will also appear on your file and may give rise to suspicion with other lenders that you have had no luck getting credit elsewhere. This will ultimately lead to further rejections.
    • Check your credit report regularly. Spotting any errors early on will ensure that your file is as accurate and as up to date as possible.

    MythbustingMythbusting

    Is there such a thing as a credit blacklist? No. Credit reference agencies hold a report about your financial history which may or may not contain adverse comments about your financial activity, but there is no 'debtor's list' which lenders refer to before striking out an application for credit.

    Can previous tenants or friends/family living in my home affect my credit rating? It makes no difference to your credit rating if the previous occupant of your home or any other family member has a problem, so long as you share no financial association with that person. Lenders are solely concerned with your ability to repay.

    Do credit reference agencies make the decision on credit? No. This is up to the lender. CRAs merely collate information on your debt history and provide a database of information to registered financial organisations.

    Do events in my credit history stay on file permanently? No. If you have been bankrupt or have a CCJ (County Court Judgment), details of these will stay on your file for six years. For minor credit faux-pas, with good financial management, i.e., paying all bills on time, you can help improve your credit history over a period of a year or two. Each lender has their own criteria for lending, and these differ from lender to lender. Although you may be turned down for credit by one lender, you could well pass with another.

  • Useful contacts

    Experian

    Experian
    Talbot House
    Talbot Street
    Nottingham
    NG80 1TH
    0115 941 0888 or 0844 481 8000
    www.experian.co.uk

    Equifax

    Equifax Credit File Advice Centre
    P.O. Box 1140
    Bradford
    BD1 5US
    0870 010 0583
    www.equifax.co.uk

    Callcredit

    Callcredit Limited
    One Park Lane
    Leeds
    West Yorkshire
    LS3 1EP
    0113 244 1555 or 0870 060 1414.
    www.callcredit.co.uk

There are several reasons why a lender may refuse credit in addition to your having a poor credit rating. For example, you may have too many debts, loans or credit card accounts to pass the lender's credit scoring check, or you may just not satisfy the lender's own credit criteria.