A bad credit rating can make financial matters very difficult for you. You may be rejected for a loan, or you may have to pay a much higher rate of interest, which could add up to additional outgoings of thousands of pounds over a number of years.
Despite its importance, there remains a fair degree of mystery surrounding credit ratings. If you want to find out more regarding your credit score, including what you can do to improve it, then keep reading.
Finding out your credit rating
The first step on your road to discovery is finding out what your credit score actually is. There are a number of major credit reference companies that keep track of your financial history. For a small fee, you can contact any of these agencies and request a copy of your credit rating, which will give you some idea of how your finances will appear to any potential lenders.
However, it is worth noting that the credit report that you receive from these reference agencies will not actually tell you, in black and white terms at least, whether you have good or bad credit. The lender that you ultimately approach will have their own criteria for approving or rejecting your application. Your credit score from the reference agency plays a part in this, but it is not necessarily the only factor. Therefore, as each lender has its own criteria, you may have different credit ratings with different institutions. One lender may reject your request, while another will grant it.
All in all, this means checking your credit rating is perhaps not as easy you might have hoped. To make matters more confusing, each reference agency has its own scoring system, with some giving you a rating out of five and others out of 999. That being said, if you do wish to drill down into the finer details of credit scoring, many agencies will offer you premium, monthly service that will include a more detailed report of your credit rating.
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Why it might not be as good as you hoped
Once you’ve found out your credit rating, you may be disappointed to find that it is not as good as you thought it might be. If this is the case, here are few of the most common causes for a bad credit rating:
- A blacklisted address: Not that long ago, you could actually end up with a poor credit score through no fault of your own. Credit reference agencies would associate bad credit with particular addresses based on the financial well being of the previous occupant. This meant that if you moved home, your credit rating could suddenly plummet. Thankfully, credit reference agencies have changed the way that they operate so this should no longer affect you. However, if you have received a credit score that is unusually low, you may want to check that all your details are correct to avoid a case of mistaken identity.
- Past financial mistakes: Previous financial misdemeanors will be taken into account when calculating your credit score. This means if you have missed payments for credit cards or loans, or failed to make them on time, your score will be negatively impacted. If you’ve ever been declared bankrupt, or had any county court judgements (CCJs) made against you, this will also be taken into account.
- You’ve never borrowed before: First time lenders can sometimes find it difficult to get a loan or acquire credit, simply because they have no credit history to speak of. If you’ve never borrowed before, lenders don’t have any way of knowing if you will be reliable with repayments.
- You don’t pay enough interest: Strangely, if you always pay off your credit card straightaway each month and only have a small amount of credit, this may lead to an inferior credit score when compared to someone with large, long-term debts. This is because lenders would rather give credit to someone that, although reliable, is likely to incur interest, as this is the way that they make money.
What to do if your credit score is poor
If you have a disappointing credit rating, the first course of action is: don’t panic. A good credit rating is not everything when it comes to financial security. If you want to acquire a loan, for example, there are ways to achieve this without a good credit rating. You may be able to negotiate with your lender to provide you with credit at a higher interest rate – not ideal, but better than being rejected outright.
On the other hand, you could look into other lenders that do not require a credit check at all. Auto loans provided by Approve Now, for example, simply require that you have a stable residence and a secure monthly income. Other lenders are adopting a similar application process, which means that a poor credit rating may not hinder you at all.
How to improve your rating
If you are looking to improve your credit rating, however, there are a few approaches you can take. Firstly, make sure you spread out your credit applications. If lenders see that you are applying for credit from multiple outlets at once, it will look like you are desperate for money and have little control over your finances.
Also, do not make unrealistic applications. Only apply for credit or loans that you are likely to receive approval for, because rejected applications will count against you when it comes to calculating your future credit score.
The best way of boosting your credit rating is to demonstrate to lenders that you are a reliable borrower. In order to do this, apply for a credit card with a high interest rate, but only borrow a small amount each month. Make sure that you pay off any credit on time, therefore, avoiding the interest payments. If you keep this up for a six-month period then you should witness a noticeable improvement in your credit score.
Having a bad credit rating is not the end of the world, but neither is it ideal. It is, however, recoverable, if you take the necessary steps to improve your reliability in the eyes of potential lenders.