Having a bad credit rating will restrict the amount of borrowing that is available to you, may mean that you will have to the pay higher interest rates than other people and even lead to utility companies requiring a deposit before you can set up electricity or landline phone accounts.
It’s thought that up to a third of adults in the UK have impaired credit ratings. There are many reasons why you might find you can’t borrow from mainstream lenders including having County Court Judgements (CCJs) registered against you, loan repayment defaults, mortgage arrears or failed utility direct debits. Other reasons could include not being on the electoral roll, making multiple applications for loans and credit over a short time period or being financially linked to somebody else with a bad credit rating.
Realising something is wrong
You may only realise that something is amiss when you apply for credit and are rejected. When this happens, not only will the application be registered on your files with the credit reference agencies – potentially making your record worse – but will mean you may have to turn to the sub-prime market – where you will pay higher interest rates and charges – to obtain credit.
If you’re turned down for a credit card, loan, mobile phone contract or other form of borrowing, there are steps you can take to rectify the situation and put yourself back on the road to having a good credit rating. None of these provide instant fixes. At the very least, they will prevent your record getting worse while some may help you to rebuild credit over a period of time.
Rebuilding your credit record
Get hold of your credit files. The two main credit reference agencies – Experian and Equifax – will maintain files on your financial history stretching back a number of years. You should get hold of those files to find out exactly what the problem with your credit profile is so that you can take remedial action. Both Experian and Equifax give free trials to new members, allowing them to download their credit history reports for a limited period of time.
When you receive your report, you will see that it contains information about your payment histories, outstanding balances and arrears for loans, mortgages, credit cards, overdrafts and mobile phone contracts. It will also show if you have any outstanding CCJs registered against you, your past and previous addresses and whether you’re on the electoral roll. Make sure everything is up to date on your files and if there are things you don’t agree with, get clarification and, if necessary, ask the credit reference agency to attach a notice of correction to show you had a valid reason for a late or missed payment.
Start making payments on time. It’s easy to get into a cycle of late repayments but it’s important to know that making a payment even a day late may be registered on your credit files. Things get worse as the days in arrears tick by and at a certain point, you will receive a default notice from the lender, which other financial institutions will regard as a black mark.
Start making your repayments on time and this will be shown clearly on your credit report and, over a year or so, negate the late payments you made previously.
Start building up your credit history. If you suspect you’ve been turned down you don’t have sufficient history, consider taking out either a credit or store card and start using them for ordinary purchases and then paying off the balance in full every month. This will start to build up a record of reliable payments, making it more likely that you’ll be approved in future applications. In cases where it’s clear your credit rating is actually impaired because of poor financial management in the past, consider applying for one of the so-called ‘credit repair’ credit cards which will charge you a higher interest rate and have a lower credit limit but more relaxed acceptance criteria. Make sure you make the repayments on time every month.
Register to vote. If you’ve been in your house for more than a few weeks, you should ensure that you are on the electoral roll. If you are not, then it’s extremely unlikely that you will be able to get any credit from mainstream lenders. The electoral roll is the first thing that financial institutions check when considering lending somebody some money. You can get onto the electoral roll online at the government’s website. If you’re worried about having your details sold, make sure that you opt out of the edited electoral register which is electronic and can be used for sales and marketing.
Use the soft search eligibility checkers. Every time you formally apply for any kind of borrowing, a record is kept of the searches carried out by lenders on your credit reference files. If you have too many of them, it can reduce your chances of being accepted for loans or credit cards so it makes sense to try to minimise the number of times that you do this.
This used to be difficult when you were shopping around for the best rate or trying to apply for your first card with an impaired rating but there is a way round this. The growth of the internet has led to a large number of money and credit comparison sites, many of who have free credit eligibility calculators which can accurately predict which companies are likely to approve an application from you. When you use these services, no search is registered on your files, meaning that you can find the best rate or find a card which will help you start to rebuild your credit profile.