Most of us have to resort to credit for the really important purchases in life such as buying a home or a car. The challenge comes when you have an application for credit rejected because your credit rating is poor.
What should you then do to increase your chances of a successful credit application in the future? Read the following tips to find out how best you can achieve this.
1 Get a recent copy of your credit report
The first thing you should do is find out how the 3 main credit reference agencies (CallCredit, Experian and Equifax) view you in credit terms. All companies providing credit always examine these agencies’ findings. Visit the agencies’ websites and follow the instructions on each site to get your free credit reports.
2 Check reports for errors
Given that an incorrect address is often the reason for a bad credit rating (there may be bad debt associated with that particular property), you should check your reports thoroughly for errors.
Get in touch with any company which the report indicates has incorrect information about you to amend it accordingly.
3 Get yourself on the electoral roll
All credit reference agencies view being on the electoral roll as improving a person’s credit-worthiness – not least because being on it requires due diligence from the authorities regarding your ID and address – so you should ensure that you are and that the information on the roll is correct.
4 Get a credit card
But credit cards are dangerous, you might reasonably think…it’s true that unwise use of credit cards is the cause of many people’s debt problems, but correctly used, a credit card can be key to improving your credit rating.
A part of your credit-worthiness is determined by how you handled previous credit granted to you, i.e. your credit history. If you don’t have any history to examine, this fact itself can lower your credit rating.
The best strategy here is only to use your credit card in situations where you know you can pay off the debt fully each month. Mortgage lenders are clearly more disposed to lending to people who have a history of making required regular repayments.
NB This approach only works if you actually do repay your card debt in full every month. Depending on your situation, you may have had difficulties getting a credit card previously, in which case you should apply to those companies who target people with a bad credit rating.
Don’t panic about the sky-high interest rates quoted: you won’t suffer them if you make timely and full monthly repayments!
5 Stay in the same address
Life developments often require people to move, whether for a new job or because you’ve embarked on a new relationship with someone. However where your credit rating is concerned, lenders favour people who’ve stayed in the same address for a length of time. It’s an indication of stability and accountability.
The converse – moving home frequently – can indicate the opposite to lenders. In the worst situation it can look as though you’re moving to keep ahead of encircling creditors!
6 Don’t apply for credit too often
The 3 credit reference agencies get a notification each time you apply for credit and if you make many applications over a short period of time, it can give the appearance of you needing money desperately.
So don’t make too many applications for credit in too short a space of time. Additionally, if your credit application is refused, don’t apply for any further credit for at least 6 months.
When you’re turned down for credit, your credit score takes a hit and if you apply for further credit soon after, the initial refusal makes it far more likely you’ll be turned down again. And when this happens your credit score will fall further, making this situation a classic vicious circle to avoid.
7 Never use a credit card to withdraw cash
The charges for withdrawing cash using a credit card are very high, which should stop you from wanting to do so. More importantly, lenders take a very dim view of the practice: there are cases where a mortgage application has been rejected out of hand because of it. Your credit rating will fall if you take out cash in this way.
Lenders consider withdrawing cash using a credit card as invariably a symptom of poor financial management. It’s much more preferable to arrange an overdraft facility with your bank and then ensure you don’t exceed the limit set.
8 Don’t use Pay Day Loans
Not dissimilar to withdrawing cash using a credit card, you should avoid resorting to pay day loans. The loans are always subject to stratospheric interest rates and lenders view people’s use of them as a strong indicator of a potentially bad credit risk.
As before, you should use cheaper alternatives such as an agreed overdraft facility with your bank.
9 Let time elapse
If you’re unfortunate enough to have experienced things like Bankruptcy Orders, County Court Judgements and Defaults, you’ll know how badly they can affect your credit rating. These stay on your credit file for 6 years.
Time, however, reduces the effects of all these ills, but only if you institute and stick to better credit handling habits.
By Marcus Simpson