Full on Finance

Your credit rating refers to the system used by lenders to assess your financial behaviour and the potential risk associated with lending money to you. A poor credit rating is established by failing to pay bills and clear debts on time, and by pushing one’s credit limit to the maximum. Having poor credit affects whether or not you will be accepted for a loan or credit card and the interest rate you will receive should you be accepted - bad credit leads to higher interest rates. There are Bad Credit loans available for those who are not accepted for other loans, but again these come with a very high interest rate. Lenders may even reject those whose credit history is too clean (i.e. those who constantly pay off their cards in full) because they are not likely to create profit for the company. So, if you’re looking to improve your credit rating, what’s to be done?
 

Monitor your credit record and identify the weaknesses

The first thing you should do is get hold of a copy of your credit report. These are available through companies such as CallCredit, Equifax, and Experian. They consist of your personal information (name, address, marital status etc), your public information (e.g. electoral roll details, court appearances), and, most importantly, your financial history - your available credit, your debt record, and so on. This information will allow you to identify what exactly has lead to your poor credit rating. In addition to this, most companies are advised to explain their decision if they have rejected you for credit so that you can see where you are going wrong, and take steps to correct this.

It is also important to read your credit record as you can check for any errors or omissions that may be having a negative impact on your rating. If you find any, talk to the company that input the incorrect data. You can also add a short notice of correction to your record explaining the error, which lenders have to take note of.

If possible, pay off all outstanding debts

This may seem overwhelmingly obvious, but it is of course highly important. If you have the means to do so, make sure all your bills and debts are paid in full. Even the smallest unpaid bill can affect your credit score and remain on the record for up to three years. Of course, this is not always possible. If you cannot afford to do so, try contacting the companies you owe money to and explaining the situation. You may be able to negotiate on repayments and find a means to pay that fits your budget – companies would rather your bills get paid over a longer period than not at all. Keep a constant eye on your bills. Using internet or telephone banking will make this easier, and will help you see if you will not be able to make a payment ahead of time, meaning you can renegotiate terms before an unpaid bill ends up marring your record.

Approach the situation logically and think things through

There are a number of small issues and changes that can be addressed to help improve your credit rating, but they require that you make decisions objectively and rationally. Firstly, if you have been rejected for credit or a loan by one company, do not immediately apply elsewhere. The chances are that the next company will reject you too as they are likely to be assessing you by very similar criteria. This can lead to an ever-worsening spiral of rejection which will not look at all good on a credit record. Instead, after the first rejection, find out why this happened, and address the problem. It may be hard to do this if you are in urgent need of money, but it will help you in the long run.

Cut up the credit cards

Secondly, don’t use credit cards for all your spending needs, especially the extravagant ones. Use it either only when needed (perhaps keep it hidden where it is out of sight so you cannot be tempted) or else use it only for small purchases that you know you can repay in full at the end of the month. The latter may be the most useful, as it demonstrates your ability to borrow and repay, which will reflect well on your credit score. On the other hand, do not think that not borrowing or not using a credit card at all will help your score. Having too much available credit puts lenders off. You need to be seen to have a record of being able to borrow and return money in order to be desirable to credit companies, so do charge smaller amounts to your card, and make sure you close down accounts that are no longer in use.

Joint accounts

Thirdly, if you are thinking of setting up a joint account with a friend or partner, make sure you are fully aware of their financial habits. Sharing a bank account with someone who has established a very good record will boost your own. Conversely, sharing with someone who has a poor record will also drag yours down. Of course, this requires you to be rather harsh on your loved ones, but if it saves you from financial difficulty in the future, it is a necessary evil. Make sure also to remove any old joint account partners from your record, because even after the account is closed, your name is still linked with theirs, and their poor credit can haunt you even after you have severed all other ties.

Seek professional financial advice

Finally, if the situation seems dire and you cannot get a handle on your finances alone, seek professional help. Accountants and credit counselling experts are available to help you manage your money more efficiently, and keep your expenditure in line.