News this week that the recession is, albeit tentatively, over. So is it possible to improve a bad credit rating and return to reckless borrowing again?
In the UK today, personal debt stands at £1,457bn. Interest repayments equal £257,000,000 daily. Banks, credit card lenders and mortgage companies, of course, make profit from lending money.
Sometimes, we mortals have no option other than to borrow; for example, when trying to buy a home. More commonly, we want to “have now and pay later.” This prevailing attitude let UK banks make £4.1bn this past year solely from penalty charges and interest on repayments missed by increasingly struggling borrowers.
However, everyone has heard about the credit crunch affecting the US, Western Europe and other parts of the globe. Too much money lent out that may not, or cannot, be paid back is pushing lenders to the brink of collapse.
Worried creditors have reduced the range of products they offer whilst tightening the criteria on who they will lend to.
Alarmingly, a recent U-Switch survey showed that credit card companies approved £17.3bn of credit applications in the last year despite failing to ask about, or verify, successful applicants’ income. Meanwhile, mortgage lenders reduced home-finance options in the past three or four months down to only 20% of what was previously available.
Creditors’ lending criteria are now all over the place and borrowers’ creditworthiness subsequently less predictable.
Credit Scoring and Status
When you ask for a bank loan or apply to a creditor for a card or finance, you will usually be “scored” in three stages:
- Checking over your credit application to make sure you meet the lender’s criteria for borrowers
- Looking at any past credit history with the lender
- Assuming you pass the first two hurdles, contacting one of the major credit reference companies for information about you and your credit behaviour over the previous six years
Credit reference agencies hold information only on individuals and anyone associated with them financially (spouse, civil partner or anyone with a joint credit history). As well as credit repayment details supplied by other lenders, records also contain information gathered from the Electoral Roll and court records.
You can correct errors on your credit reference file. The UK Information Commissioner’s Office publishes an excellent booklet called “Credit Explained” detailing different credit reference agencies and explaining how to obtain or correct your record.
Protecting Your Credit Rating
Every lender is different and carries scores according to the degree of risk they will accept against potential profit. Credit scoring essentially tries to predict your behaviour in terms of borrowing and repayment patterns.
You can take steps to protect or even enhance your rating and here are some tried and tested suggestions:
- Get a copy of your credit report at least once a year. The main three credit reference agencies are Experian, Equifax and Call Credit. Don’t apply too often though as this can reduce success with lenders suspicious of repeated report requests.
- Ask prospective lenders for a “quotation search” rather than a “credit search” if you seek a specific quote for a loan.
- If refused credit, check your report for mistakes. Make amendments where errors occur on record. It costs nothing to put a “Notice of Correction” (of up to 200 words) on your file and this should take effect within 28 days of submission.
- Make sure you are entered on the Electoral Roll. Creditors need to confirm where you are registered as living – even if it is at your parents’ or partner’s home. Your local authority can help you with registering.
- Make payments to creditors on time and as contractually agreed. Late or missed payments can be marked as defaults on your report and this will damage your status.
- Check to ensure no-one has assumed your identity and made fraudulent credit applications. You may want to visit www.identityfraud.org.uk.
- Be aware that the credit status of anyone you took out joint credit with in the past may still influence your own record today. You can inform credit reference agencies if you no longer have a financial connection with someone and they should remove all record of such associations.
- Cancel unused credit and store cards as they can reduce your borrowing capacity in the eyes of lenders.
The above should help.
Dealing with an Ongoing Bad Rating
However, all is not lost even if you do have a bad credit rating – perhaps with court judgments – and want to do a repair job.
You could take out a more expensive “high risk” credit card – there are a few carrying interest of 30% and above – to use for between six months and a year. It is important to spend very little using the card and to repay in full each month (so that you don’t have to pay high interest and risk penalty payments for defaults). After about a year of punctual payments on the card, your credit status will improve and you should then be able to start accessing mainstream credit again.
Please note that there is no point in borrowing from doorstep creditors. They specifically target people with bad credit records and rarely register any repayment details with credit reference agencies.
More people now face stricter credit scoring in this difficult economic climate. However, the lending industry is not shutting down altogether and so the above advice should help.
If you have debt problems – and be honest with yourself – perhaps you ought not to borrow more but instead seek free money advice through Community Legal Advice.
There is never any need to pay for debt advice and so-called “debt repair” companies really are best avoided.
(This article is based on journalistic research. It does not constitute financial advice. Any information should be considered in regard to specific circumstances. All tips are followed at your own risk and should be followed up with your own research.)