When you get turned down for any form of credit – a card, a loan, a mortgage or even a mobile phone contract – it’s likely that your credit rating is impaired in some way. That means that the record held by one of the credit reference agencies contains information which is marking you down as a poor credit risk for the lenders. That could be because you’ve made a few financial mistakes at some point in the last six years or there could be something more serious registered against you like a county court judgement (CCJ) or defaults.
While this will make it difficult for you to be approved for credit in the short term, there are a number of steps you can take to improve the situation over the medium or longer term. Even those with the worst credit scores can start to do things that will improve their prospects of obtaining credit in a year or so.
It’s important to stress that there is no single quick fix when it comes to repairing your credit rating. To do so takes time, discipline and a bit of patience. While you are in the process of repairing your credit record, it’s vital that you don’t try to ‘test the water’ too much by making too many applications for credit in a short space of time. Lenders see multiple credit searches on your account as indicators that you might be in financial difficulty or that you are not disciplined when it comes to money.
If you want to find out what your credit rating is while you are attempting to repair it, the best thing to do is to sign up for one of the subscription plans offered by the three main credit reference agencies – Equifax, Experian and CallCredit. You’ll be able to see your credit score, the status of all of your loan and card accounts and whether there are any other black marks like defaults, CCJs or not being on the electoral roll.
You can also use on of the pre-eligibility checks that some lenders now offer online. These are also available on some of the major credit comparison sites and give you a good indication of what credit cards or loan applications would be successful without a credit search being registered on your account.
In the meantime, here are the five major steps that you can take to improve your credit rating:
- Commit to making your repayments on time
Even if it is just means making the minimum payment each month, keeping all of your credit accounts up to date is an absolute must when it comes to repairing your credit rating. These are updated every month by the credit reference agencies and will either show that everything is up to date or that there is a delinquency (a late payment). A delinquency will show as a number of days and the amount that is overdue). If you continue to make payments on time, every month on all of your accounts, this will have a dramatic effect on your overall credit score in a matter of months assuming that you don’t have anything more serious registered against you.
- Settle accounts that you don’t use
It may feel safe to have a large number of unused credit cards in your wallet but it does you no favours when it comes to your credit rating. Lenders don’t like to see that you have too much credit available – indeed, they prefer it if you have a smaller number of cards or loans which are used regularly and are kept up to date because this will show that not only do you represent a low risk, but that you are actually likely to make them more money in interest if they decide to offer you more credit. So, it makes sense to close any accounts that you are not using to bring your total amount of potential debt down.
- Apply for a ‘credit builder’ card
Some of the major banks and larger financial institutions have versions of their mainstream cards that are specifically geared to people with impaired credit ratings. These are known as ‘credit repair’ or ‘credit builder’ cards and two of the most well-known ones are offered by Barclaycard and CapitalOne. They come with higher interest rates and lower credit limits than those offered to people with good or perfect credit records but they will allow you to borrow a small amount of money and then demonstrate that you are financially responsible by making your repayments on time every month. Every time you make a repayment, this will be shown on your credit record and will improve your overall score.
- Guarantor loans
You may not be able to successfully apply for a loan on your own but that doesn’t mean that you can’t apply for credit and then start repairing your credit record by making payments on time. A guarantor loan uses a third party – somebody close to you who is able to guarantee your borrowing – as security against your borrowing. While the lender will use the guarantor’s credit record when making its decision on your loan, it will be your credit rating which will improve each time that you make a repayment on your loan.
- Other sub prime loans
Thankfully there is a strong and growing market for the so-called sub prime sector – people whose credit records are impaired and face rejection by mainstream lenders. Virtually every kind of credit is offered by lenders in this market – loans, mortgages, car finance, etc. While the criteria that sub prime lenders use to make their decisions are less strict than the high street banks, the effect of repaying these forms of credit on time are exactly the same: your credit score improves gradually over time to the point that you can once again start applying for mainstream credit.
Article provided by Mike James, an independent content writer working together with technology-led finance broker Solution Loans, who were consulted over the information in this post.