25th March '08 - How Your Credit Rating Affects Borrowing
When you borrow money, the banks and lenders decide on how much credit to give you based on your credit rating. Improving your credit rating will mean lenders could be willing to offer you better interest rates.
There are a number of steps you can take to make sure that your file leaves a good impression, and so avoid the frustration and inconvinience of being turned down for credit.
Three credit reference agencies, Experian , Equifax and CallCredit, hold information about every financially-active adult in the UK.
These files combine your personal information, such as your name, partner's details and previous addresses, publicly available information from the electoral roll, court judgements, and details of bankruptcies and your credit and financial history, including details of all your current and previous financial accounts, when you have applied for credit in the past, how much credit you currently have available to you (in the form of credit cards, for example) and your record of paying back debt.
Under the Consumer Credit Act 1974 you have the right to see a print out of your file, at a cost set by the government of £2. To get a copy of your credit report, which is just a copy of all the information used by Experian, Equifax and CallCredit, visit the firms' websites. All three companies also offer premium services to help you manage your file.
If you are turned down for credit, most industry codes encourage companies to disclose the reasons for their decision. This can help you to understand which part of your credit history is letting you down, and how you can improve your overall credit score.
To ensure you are not turned down on the basis of old information you must ensure your details are kept up-to-date – you can do this by updating your details on the electoral roll.
Banks and building societies usually need to know that the information about you is up-to-date before they are willing offer you a financial account. Maintaining your presence on the electoral roll is particularly important. Register with your council as soon as your move house. Credit reference agencies update their details from the electoral roll on a monthly basis, so registering, if you haven't already, will quickly improve your score.
You should check your credit file at least every year to make sure that all the information included is correct. You could ask Experian, Equifax or CallCredit to monitor your file, usually for signs of ID fraud, and alert you to any updates made to it. You’ll be charged a subscription for this.
If there is anything incorrect on your file the credit reference agency will flag this as “disputed” and consult the company who provided the information. You do not want an error to indicate that you are a debt risk.
Credit reference agencies suggest adding a 200-word statement, called a Notice of Correction, to your file if there are details on your report which might be worthy of an explanation. Lenders legally have to look at these notices, but you shouldn't add too many to your file, as there are suggestions that this may also deter lenders.
A missed bill payment can have an affect on your credit score. For example missing a payment for a bill as trivial as your mobile phone contract could have a detrimental affect on your credit file, and will remain on your report for three years.
However, missing a payment may not be the end of the world. Keep an eye on your finances through budgeting, internet or phone banking, and if you think you might not be able to make a payment that is coming up, stop your direct debit and call the company involved. If you can arrange to pay the bill later it may not be recorded as a missed payment on your credit file.
If you do miss a payment and then close the account in question within three years, a record of that missed payment will remain on your file for a further six years. Try to keep these accounts active until the missed payments drop off your file before closing the accounts down.
For the sake of your credit file, it is better to borrow than not at all. Lenders want to know that you can manage credit responsibly. However, too much credit already on your file will worry lenders and put them off giving you any more. Too little, and they will see you as unprofitable.
A credit file that will really make lenders smile is one that demonstrates that you have a proven track record of successfully managing credit, whether that is in the form of timely repayments on a loan, or clearing the monthly balance on your credit card.
If there is no evidence that you will be able to do this, the lender might refuse you credit on the basis that you have no proven track record of paying off debt.
To get around this, you could use a reward points or cash-back credit card strictly just to buy your groceries every week (and clear the balance at the end of the month). You will enhance your credit file and earn yourself points or cash you can enjoy later on.
Any credit card will do, but store cards, with their exorbitant interest rates, should always be avoided, no matter how good your intentions are.
Lenders will look at your credit report to find out how much available credit you have at your disposal. If this available credit is too high, lenders might decide that you shouldn’t be given any more. Close down credit card accounts which you aren’t using to make sure this does not happen.
When applying for credit, you should be aware of your credit footprint. A “footprint” describes the mark left on your file every time it is viewed by a company. It means you know who’s checking out your file. But it also gives the bank an idea of how often you are applying for credit. Too many footprints and alarm bells may ring.
If you have been turned down for a credit card or a loan, don’t rush to apply for more. Instead, ask the lender who refused your application for an explanation. If they point to something in particular on your credit report, it is likely this will deter other lenders too, so instead work on mending the damage.
If you need credit urgently, try a lender which specialises in loans for people with less-than perfect records.
Just as a financial association can pull down your overall score, however, it can also give yours a boost. If you are struggling to get credit, particularly because you may be younger, and without a credit history, having a name on your report which is more established will strengthen your case.
Even if your credit rating is low, you will still have access to a home loan, although you will have to pay higher rates of interest. But if you keep up with your repayments for a couple of years, you are likely to become eligible for cheaper mainstream deals when you come to remortgage.
The author of this article is Heather Ale, who draws on extensive journalistic experience to write on specialist finance matters. She has worked across the world and is a leading writer in her field.
This article does not represent ‘financial advice’ as each person's individual requirements will be unique to their specific needs. If there is something in the article which you wish to rely on, please check those details with the person/company with whom you arrange financial services or debt management plans.
The views in this article represent those of the author and not those of Netbasic Limited.
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