Once upon a time, our creditworthiness was decided by our personal reputation. These days lenders use your credit report to decide whether you’re a good risk – so make sure you keep your credit rating high.
Whenever figures about the UK’s growing personal debt are released, some commentators throw their hands in the air and complain that we’ve become a nation dependent on credit.
But you only have to think back a few decades to remember a time when credit was part of the fabric of everyday life.
Before chain stores, supermarkets and credit cards entered the mainstream, families would often have credit accounts with a wide range of local suppliers – the grocer, butcher, hardware store, petrol station and so on.
Back then, though, each individual trader would take a personal decision on whether to allow you credit – normally based on what they knew about you, your work and your family. The bank manager did the same when he weighed up whether to grant you an overdraft.
Preserving your financial reputation
Credit granted on this basis could help you manage your household finances more effectively, so it was worth keeping your nose clean and making sure your reputation remained high locally. Bad rumours about your spending or financial recklessness could ruin your credit for good.
These days, things have moved on dramatically, but the need to keep up a good financial reputation is as important as ever.
When we need credit, we tend to turn to much larger organisations who don’t have the same personal relationship with us. When you apply for a loan, credit card, car finance, store cards, mortgage or similar products, the chances are that the decision lies in the hands of someone who has never met you.
So their first step is always to turn to your credit report and check your credit rating.
What is a credit report?
Your credit report is a dossier containing information about the credit agreements you hold with lenders and creditors.
When you take out a credit agreement, each creditor will add details to your credit report including the current balance of your account, along with information about whether you are making your payments on time and in full.
If you are managing your financial affairs well, your credit report will reflect it. On the other hand, if you’re missing payments or finding it hard to cope with your debts, that’ll show up on your report instead.
Your credit rating – which is used by lenders and creditors to weigh up your applications – is based on your credit history.
So if you want to enjoy the best credit rates, and avoid the possibility of being turned down for credit, a mortgage or a loan, it’s crucial to keep your credit rating in good shape.
But how do you do that?
What damages your credit rating
There are a number of factors that can affect your credit rating, but they fall into two main categories – activity that gives you a bad credit history, and behaviour that can improve your credit rating.
The most common things that can damage your credit rating are:
- Making late payments
- Failing to make repayments
- Having debts written off
- Applying for a lot of credit in a short period of time
- Being rejected for credit in the recent past.
All of these factors indicate that you are having trouble managing your finances – and even that you might be desperate for credit – so lenders usually look at them unfavourably.
In addition, if you have a County Court Judgement (CCJ) against you, or you’ve entered into an IVA (Individual Voluntary Agreement), these will remain on your credit history for six years – and they can be a real obstacle to obtaining future credit.
What improves your credit rating
Luckily, even if you have a bad credit rating, it’s not impossible to turn it around.
The key is to manage the credit accounts you already have well, and not to apply for additional credit you can’t afford.
Some of the best ways to do this are:
- Keeping up with all current repayments, and not missing repayments for loans, credit cards or your mortgage
- Cancelling unused credit cards (unless you have a good reason not to)
- Use any savings to pay off debts
- Making sure you’re not affected by a former partner’s credit problems – if you split up, write to credit agencies and ask for a notice of disassociation to be put on your file.
- Pacing credit applications – don’t make multiple applications within a short space of time.
And perhaps most importantly of all, make sure you’re on the electoral roll – if you’re not, very few lenders will be willing to consider you.
How can I check my credit rating is improving?
Better still, services like these will alert you to any changes to your credit history, allowing you to act fast if you become a victim of identity fraud and a stranger starts opening accounts in your name.