Your credit rating can affect your ability to borrow money using products such as credit cards, loans and mortgages. If your credit rating isn’t in the best shape there are things you can do to build it up again and fix any problems. Here’s how to do both.
- Why your credit rating’s important
- What impacts your credit rating?
- How to improve your credit rating – things you can do now
- How to improve your credit rating in the longer term
Why your credit rating’s important
Your credit rating is used to help lenders decide whether to lend you money, how much to let you borrow and, in some cases, how much interest to charge you.
What impacts your credit rating?
Clearly it’s best to avoid those things that can have a negative impact on your credit rating in the first place. Here are some of the things that may affect it. Take a look and see if any apply to you.
High levels of existing debt. Banks and credit card companies may be nervous about lending you more if you’re already over stretched.
Missing or making late payments on anything from your mortgage, credit card, personal loan, gas or electricity bills will stay on your credit file for six years.
If you get a county court judgment (CCJ) (called a decree in Scotland) for an unpaid bill this will have a serious impact on your credit score. CCJs stay on your file for six years.
Open credit cards accounts that you never use. Lenders will look at how much credit is available to you, not just how much you’re actually using.
Not being on the electoral register. This is used by lenders to verify that you are who you say you are.
Moving home a lot. Lenders feel more comfortable if they see evidence that you have lived at one address for some time.
Being tied into any joint form of credit such as bank accounts, loans or mortgages with someone who a poor credit history, known as ‘financial association’, as this will affect your ability to gain credit.
How to improve your credit rating – things you can do now
If your credit score is poor or you have no history of borrowing for lenders to see, there are immediate steps you can take to improve your credit score.
How to improve your credit rating in the longer term
If you’ve had debts, you need to show lenders that you can borrow responsibly. In time, this will improve your credit score.
1.Pay on time
Make your repayments on time and pay off your accounts early if you can. This shows that you’re a sensible borrower. If you’re using savings to pay off debts, make sure you keep enough cash in an easy access savings account for emergencies.
2.Use a credit-builder prepaid card
Some prepaid cards have a credit-building option that can improve your credit score. The way this works is you are ‘loaned’ an amount, usually £60, by the prepaid card company. You sign a credit agreement and agree to pay the card company a monthly fee of £5 a month to repay your £60 ‘loan’.
At the end of the year, providing you haven’t missed any fee payments, this will be recorded on your credit report as 12 months of successful repayments.
Bear in mind that all prepaid cards charge fees. For example, you might pay £5 to get the card in the first place, 2.5% on everything you spend and an extra £1 fee whenever you top up. Shop around to see if you can find one with fewer fees.
3.Credit-builder credit cards
If you have a poor credit history then there are credit-builder credit cards you can apply for.
Be aware that the interest rates charged are much higher than standard credit cards. Typically, you’ll be paying over 30% in interest a year so you must make sure you pay off any balance in full each month. Otherwise you’ll get into debt that you may struggle to get out of and harm your credit score even further. Credit limits on these types of cards are typically low.