Although people with a poor credit score may find it difficult to access financial products such as loans, mortgages or credit cards they may also find that services such as mobile phone and utilities contracts are more expensive than they would be for others. However, all is not lost, and poor credit doesn’t need to last forever. There are some sensible steps that you can take to improve things.
1. Get hold of your credit reference file
Obtaining your credit reference file may seem like an unnecessary expense but it’s an important first step in getting you back on the road to good financial health. All Credit Reference Agencies in the UK are legally required to provide you with a Statutory Credit Report for just £2 so don’t be enticed into paying more. Your credit reference file details your borrowing history (including late or delinquent payments), any bankruptcies or County Court Judgments within the last six years, your current and past address history, and the name(s) of anyone you’ve ever shared credit with such as a joint credit card or loan. Your credit reference file is passed on to lenders by a credit reference agency to help them to decide if they’ll allow you credit.
However, credit reference files can contain errors so examine your file carefully for any inconsistencies. Information you should dispute includes ‘hidden debts’ (either debts you know nothing about, or debts that you’ve paid off but which are still showing on your file), as well as incorrectly spelled names and addresses. You should also make sure that your correct birth date is listed. It is mistakes like these that can mean being refused for credit by lenders – if you don’t know that there are mistakes on your credit report, neither will they. If you notice any errors, take steps to deal with them as quickly as possible. You should check your credit reference file every 12 months, and always well in advance of applying for any form of credit.
2. Get on the electoral register
This is one of the easiest things that you can do to improve your credit rating. If you’re not already on the electoral register, visit GOV.UK for step-by-step instructions. Lenders check your credit rating by using credit reference agencies who in turn use the electoral register to confirm your identity in order to prevent fraud. If you’re not on the register when you make an application for credit, a credit reference agency will likely assume that you either don’t exist or that you don’t have an existing credit history. This makes it unlikely that you’ll be approved for credit by a lender.
3. Play the waiting game when you need to
If you’ve had a county court judgment, an order for non-payment of debts, an individual voluntary arrangement (IVA) or have been declared bankrupt within the past six years, your credit reference file will show this. This will likely make lenders believe that you’re a high-risk borrower and you may not be approved for credit. If you’ve had a county court judgement and you’ve been able to pay it in full within one month, it may be possible to have it set aside by the court, and if it took you more than one month to pay the judgment, you can send proof of payment and for an administrative fee, ensure that creditors see that the judgment has been satisfied. This will potentially improve your chances of obtaining credit.
4. Cancel any unused credit cards and bank accounts
Lenders always look at how much credit you already have available to you via loans, credit cards, store cards, and overdrafts. But there are things you can do to reduce the risk of rejection on the basis of having too much credit. Cancel all unused credit and store card accounts, and close any unused bank accounts. You should obtain formal notification when the accounts have been settled and closed from the lender or bank. You will then want to recheck your personal credit reference file within six months to ensure that these accounts no longer show on your file.
Another tip is to refuse a high overdraft or credit card limit if it’s offered to you. Keep your limits as low as possible. The more credit a lender thinks you have available to you the less likely it is that you’ll be approved for a loan or card.
5. Get a credit card
A credit card helps you to demonstrate to lenders that you’re a good borrower. Having a poor credit history doesn’t make obtaining a credit card impossible (although the interest rate the lender charges may be higher than they would offer to people with a better credit rating). The point here is to spend little on the card and pay it off in full every month. Don’t miss even one payment or pay one day late, and never pay the minimum payment due which will seriously (and expensively) delay you from paying off the loan. After 12 months, you’ll have built up a reliable credit history demonstrating to lenders that you’re unlikely to default on any credit they approve you for.
6. If at first you don’t succeed…don’t try again for a few months
This doesn’t mean that you can never apply for credit again if an application has been turned down – it simply means that you should wait for a few months before trying again. This is because lenders will see that you have applied to a number of other lenders (known as your ‘credit footprint’) and they might well take it as a sign that you’ve been turned down by others for good reasons. Banks and other lenders rarely risk lending to someone who appears to be in dire need of credit, so waiting before trying again can lessen the risk that this will happen.
7. If you’ve been turned down, ask the lender why
It’s important to ask lenders why you’ve been turned down; they‘re obligated to be honest and forthright. If the lender tells you that you’ve had a number of loans in the past and one has been defaulted on, check your credit reference file if you know that this isn’t true. Take steps to resolve the error(s) by righting the wrongs. You can learn more about your options if you’ve been turned down for credit by visiting GOV.UK
8. Never miss a payment or pay late
Missing even one payment, or paying after the due date, is a big mistake. If you do, your credit rating will be affected regardless of whether the payment missed was for utilities, the mortgage, a mobile phone bill or credit card. The type of payment is not important – it’s making the payment on time that counts. In fact, a potential lender can see if you’ve missed a payment (even one!) in the last three years.
Setting up a Direct Debit to leave your current account a few days before the bill is actually due is really smart. If paying a credit card balance off, you can always make sure that the minimum payment due is paid via Direct Debit and top it up manually. If you can’t afford to pay, speak with your creditors to agree an arrangement rather than defaulting which will have a very negative impact on your credit rating.
We also offer free, confidential and personal debt support through our partnerships with trusted debt charities including PayPlan.