When it comes to the really important purchases in life, most of us need credit, and this is particularly true for most first time home buyers. But what if you discover that your credit rating is poor? Here are 8 steps you can take to improve the situation.
1 Make sure you get a copy of your credit report
In simple terms, you should start by finding out how the 3 main credit reference agencies (CallCredit, Experian and Equifax) view you as a credit risk. You can get free reports from each of them; start by visiting their websites and following the instructions.
2 Check that the information on the report is correct
Don’t assume that the agencies hold correct details for you – even regarding your correct name and current address. An incorrect address can often be the reason for a bad credit rating (there may be bad debt associated with the property).
You should write to any company which the report indicates has incorrect information about you to amend errors.
3 Get on the electoral roll
All credit reference agencies view being on the electoral roll as improving a person’s credit-worthiness so you should ensure that you are and that your details are up-to-date.
4 Obtain a credit card
This might strike some as curious, but the fact is you need to develop a credit history in order for credit reference agencies to score you. Generally if someone has no record of using credit, this in itself decreases how credit reference agencies view them.
The best thing to do here is to use your credit card only to purchase what you can afford to pay off each month in full. Mortgage lenders are more likely to lend to people who regularly make the full repayments required of them.
NB You must repay any credit card debt fully each month for this approach to work. If you’ve had difficulties getting a card in the past, apply to companies who offer cards to people with a bad credit rating. The interest rates quoted may be eye-watering, but because you’re going to pay off the debts each month, you won’t have to suffer them.
5 Keep the same address
It’s fully appreciated that life can sometimes force you to move about; perhaps you’ll move for a new job or when you start a new relationship with someone. But the fact is the longer you stay living in any one property, the better you’ll be viewed as a credit risk by lenders.
They view this as a sign of stability and consistency – and moving frequently as the opposite. You can help this strategy further by registering everything you have to this one address.
6 Keep down the number of times you apply for credit
Every time you apply for credit, the credit reference agencies are made aware of it. If you do this many times over a short period, it might indicate that your money needs are desperate and that you’re not managing your finances well.
You should therefore keep your number of credit applications down – and if you are turned down for credit, as a general rule you should not apply again for a minimum of 6 months.
7 Don’t ever withdraw cash using a credit card
As a general rule, you should never withdraw cash using a credit card. Beyond having to pay sky-high interest charges for doing this, lenders view the behaviour almost always as a sign that you manage your financial resources poorly.
8 Time is the greatest healer of all
Matters such as County Court Judgements, Defaults and Bankruptcy Orders certainly impact your credit rating badly and stay on your file for 6 years. But all the negative effects of these fade over time, as long as you institute improved habits where handling credit is concerned.
As with so many things in life, the key is to make a start on your new regimen and then stick to it.
By Marcus Simpson