Credit Advice
How to make sure you’re good for credit?
Introduction
In this current economic crisis, we have all been taking a fresh look at the state of our finances. We have been desperately searching for ways to cut back on our expenditure, from cutting out the daily trip to the local coffee shop to taking up jogging in the park instead of taking out an expensive health club membership. However, although making all these savings is very important, now more than ever it is also vital to keep your credit record absolutely spotless. There are few things more frustrating than lenders rejecting you at a time when you need to borrow money. The good news is that you can take control of your credit record and perform a few simple checks which will give you the best chance of success when you make your next application.
Understanding the process behind the report
Before finding out about how to take control of your credit record, it is important to understand the process lying behind these reports, which are used by lenders to assess whether or not you are in a good enough position to be trusted with a loan. Credit reports are created by credit reference agencies, which use financial information gained from banks and building societies, credit card issuers, utility companies, phone companies, and mail order firms to calculate a credit rating for each individual. This rating is expressed in the form of a number between 300 and 850. As a general rule, any number over 700 is viewed as positive. You should bear in mind that credit reference agencies also use information provided by the electoral roll and the rating takes into account any previous lawsuits which you have been involved in.
Each lender scores an individual according to information provided by credit reference agencies. There is no such thing as a universal credit rating and this is something that many people are still unaware of. This means that if you are rejected straight away by one lender, you may still be accepted readily by the next lender you apply to for a loan. Each lender may use slightly different criteria to score each individual, so it is important that you never give up hope of being successful. Along with the information included on your credit report, banks will also take into account the basic information written on your application form as well as any past correspondence that you have had with them.
For this reason, it is important that you do not worry about your credit report to the exclusion of everything else. You will also need to make sure that your application form is full and accurate prior to submission. Making a mistake when filling in your salary details is unfortunately all too easy to do but this can be severely detrimental to your cause. Imagine the difference between submitting a form which declares your annual earnings to be £2000 when you actually earn £20000, but missed off a nought in your haste to get the form filled in. It is also worth putting a landline number on your application form, rather than a mobile phone number if this is at all possible. This will make you look more of a stable individual and any indicators of stability (including living at the same address for a long period of time) are positive. One final tip, and perhaps the most important thing to be aware of, is that you should never ever think about lying on your application form. Lying can only backfire on you and should never be attempted, no matter how tempting it may seem.
What lenders do not know about you
It may seem that lenders have every single piece of personal information about you at their disposal. However, the good news is that you don’t need to worry about certain pieces of information becoming available to banks. For example they will never be allowed access to any previous fines that have been imposed on you, so you can stop worrying about the impacts of that fifty pound parking ticket straight away.
Furthermore, your medical history and your criminal record will not be taken into account. This second fact surprises many people. Information held by the Child Support Agency will not impact upon your credit rating either. Finally, information about your savings account will not be made available to lenders as savings are not related to credit.
How to look at your credit rating and what to look for
You may believe in theory that your credit record is spotless but it is always extremely important to check it before making an application for a loan. Luckily, gaining access to your report is relatively simple. Credit reference agencies are required by law to provide you with a copy of your report if you so wish. A small fee will be charged for this (this fee is currently £2) but it is a small amount to pay for peace of mind. It is worth checking your credit report approximately once a year. Ideally, you should check the information held by the three major credit reference agencies but, if you choose just one agency, it should probably be Experian.
When you have been given your report, check it extremely closely. Firstly, check the basic information provided, including addresses. If your address is inaccurate, your credit rating may be being affected by someone else’s financial activity. You are entitled to query listings which you believe are incorrect. The agencies responsible for gathering data about you are legally obliged to contact the sources of the information to assess the validity.
These sources will need to show that the information they have provided is accurate and legitimate. If the information is found to be even remotely inaccurate, the credit reference agency will remove it from your report. A close inspection of your credit report should also show you whether other individuals have been committing ID fraud at your expense by applying for loans in your name.
You should also make sure that your rating is not being negatively affected by other people with whom you have previously been associated with, for instance an ex-partner. If these individuals are incurring debts, your credit rating may suffer even though you no longer live with them. Make sure that you inform the credit reference agency of any issues immediately, so that they can remove the association as soon as possible. Bear in mind, however, that other people cannot impact upon your credit score unless you entered into some form of joint financial account with them.
Many individuals are unaware of the input that they can have on their credit report. For instance, if you have been rejected in the past due to problems of a personal nature, you can add a short note of correction which explains these factors. Such problems could include periods of illness or redundancy. These notes of correction are always taken into account, so it is worth writing one if you feel that it will help you. Bear in mind, however, that including notes of correction in your report will usually lead to applications taking longer to process. When writing these notes, remain factual and unbiased and do not ramble since this will annoy lenders and put your application at risk for no good reason.
How to improve your score
Credit repair agencies have made a lot of money from scaring people into thinking that they need their services in order to improve their credit ratings. However, the work undertaken by credit repair agencies really is not rocket science and you should be able to improve your credit score yourself by taking a few easy steps. Furthermore, the advice offered by many credit repair agencies can be slightly suspect and may end up doing more damage than good. Many of the steps which should be followed to improve your credit rating simply depend on good common sense.
Become involved in a credit relationship
Becoming involved in a successful credit relationship will show potential lenders that you are familiar with the process of paying back money. If you do not have a credit relationship at all, lenders may not feel comfortable becoming involved with you. For this reason, many young people are unsuccessful when they apply for loans, even if they think they have no blemishes on their records.
Re-think your attitude towards store cards
Many people think that store cards should be avoided like the plague and, in most situations, they are entirely correct in holding this opinion. Interest rates for store cards can be as high as thirty per cent and usually they should not be considered. However, as long as you ensure that you pay off the balance in full every month without fail, the very fact that you own a store card and use it regularly will allow you to successfully rebuild your credit rating.
Ultimately, some people will still want to avoid store cards, regardless of the potentially positive effects of using one. A safer option for these individuals may be to take out a reward points credit card. As long as you make sure you clear the balance every month this remains a good option which involves relatively few risks. Furthermore, you will be provided with points which you can use at a later stage.
Pay your bills
You should make sure that you pay all your bills on time, including mobile phone bills. On this note, taking out a contract with a mobile phone company is actually a better option than buying a pay-as-you-go model. Signing up to a credit contract like a mobile phone contract will improve your credit rating as long as you consistently keep up with the monthly payments. It is never too late to start the process of paying all your bills on time and in full because your recent history is far more important than your general record over the past few years. Think about setting up your bank account so that it makes automatic payments. This will help less organised individuals pay their bills on time. However, if you are planning on doing this, you should make sure that your account contains enough money at all times to protect against overdraft charges.
Sadly for individuals hoping to borrow money, it is not easy second-guessing precisely what specific lenders are looking for. For instance, if you consistently pay off your cards in full, something which seems like good credit behaviour, the lender may reject you on the spot. Those credit card customers who always meet the minimum repayment every month but still remain in debt are very profitable for banks, and thus, slightly ironically, very desirable to lenders.
Try not to shut down credit card accounts
You may think that closing credit card accounts is not doing your credit rating too much harm. However, you may be doing much more damage than you think by doing this. If you close an account after paying off one of your cards, you will be altering the gap between your debt and spending limit, to your detriment. This said, you will need to balance this fact against your ability to control your spending. If you are having issues reining in your expenditure, you should simply accept the fact that your credit rating will suffer slightly by shutting down accounts. This option is far better than getting into debt.
Check your electoral status
It may seem relatively insignificant but you should make sure that you are registered on the electoral roll. If you are not registered, you may be automatically rejected by certain lenders who have tightened their criteria. This may be a particular issue at the moment given the uncertain economic climate. Thankfully, it is easy to check your electoral status. Simply write to your local council and ask them to confirm that you are registered on the electoral roll. You should check your electoral status as soon as possible because credit reference agencies perform updates from the electoral roll once a month. This means that registering with the roll can have almost immediate positive impacts. If you are not eligible to vote, you should send the credit reference agencies firm proof of your residency. They will then add a note to your report to explain your status to lenders.
Do not make too many applications
If you are rejected by a particular lender, do not go crazy and keep submitting applications. Credit searches leave their tracks on your report and, if these searches are conducted within a short space of time, your score could be affected. Every time a company views your file, a footprint is left and too many footprints will repel potential lenders. If you have been rejected, before rushing to make another application, simply ask the lender for the reasons why they did not process your application. The lender may point out something specific on your credit report that made them reject you and you can then work on sorting this out before you make another application and incur further damage. The lender should also tell you which credit reference agency they used to collect the information about you.
Bear in mind that timing is everything when making applications. So many things can affect the success of your application. For instance, the process of moving house can impact upon your score. For this reason, you should plan your application in advance and apply before you start the moving process. Being unemployed will also not benefit your application. If you are about to take a period of leave, you should make your application beforehand. If you think that there is any chance that you may be made redundant, you should similarly apply when you still have your job. This is particularly important at this time of uncertainty, when we are all worrying about our job security.
Conclusion
Financial processes, including making applications for loans, can seem very confusing. However, once you research them on the internet and ask experts for advice, they will become relatively simple. With regards to credit, simply pay close attention to the state of your report on a regular basis and use your common sense. Remember never to become involved in the vicious circle which can result from making too many applications in a short space of time.
If you would like to find out more about credit reports, the following links may be useful:
