How To Improve Your Credit Score
From a mobile phone to a house, it is critical that your credit score reads happy
, if you planning to take a loan for the purchase. The current economic climate has only forced lenders to raise the bar and it has never been more important than now to have a credit score thatll impress the lenders. Heres a simple-to-follow guide on ways you can improve your credit score.
The current economic climate is a testing time for everyone, especially banks and financial institutions. The world at large and particularly UK, until recently, have been enjoying easy money, with banks and financial bodies more than happy to provide you with a loan. Things have changed now and lenders are looking for an excuse to reject your loan application. Unless of course your credit score is real good.
Understanding the mechanics
From a lender perspective, credit score reflects your reliability, risk profile and financial discipline.
If you have been staying at the same address for a long period of time, if you have been with the same employer for a fairly lengthy period, if you have been banking with the same bank, again for a respectable stretch of time, if you have lesser number of inactive or closed credit accounts, then the credit scoring system would award you with a better score since the odds are stacked in your favour and you certainly give the impression of being reliable.
On the other hand the work that you do, your age, marital status, number of dependents you have, your home ownership status, the financial discipline of your neighbourhood and that of those who lived in your property earlier determine your risk profile.
However, the points discussed above, that determine your reliability and risk profile cant be autocorrected. Its important to understand that your credit score cant be improved overnight and there are some things that are beyond your control.
A credit score is based on information maintained by the credit agencies and in the UK there are three main agencies. Very often the three agencies can rate your scorecard differently from one another, depending on what information each agency holds and occasionally it is possible that these agencies have wrong data as well.
Dos & Donts to improve your score
No or low levels of credit activity is not going to help you get a better credit score. Lenders like to see a few credit accounts based on which they can judge you. So dont be afraid to get yourself some credit accounts.
Paying your bills and other financial commitments on time is extremely important. Always pay before the due date and pay the full amount if possible and certainly the minimum payment on credit cards.
Setting up direct debits should be very useful and will ensure you dont forget paying on time. However ensure all direct debits are always honoured.
If you have a few direct debits that are automated through your bank account, it would be a good idea to have an agreement with the banks to provide you with an overdraft on the account which you do not use under normal circumstances except for when you forget a direct debit.
Its best to have direct debits going out in specific time range in the month rather than have them spread all over the month, this way planning for the direct debits should be easier.
Dont apply for too many credit applications at the same time, this indicates you are desperate and reduces the credit score.
Not applying for any credit applications is also not very good since this indicates you are not financially very active. Usually 2-3 credit applications in a 6-month-period are considered ideal. Spread your needs. Applying for 2 credit cards, 1 car loan and a personal loan in a short span will not help.
Unlike what many people think, checking your own credit score is not considered as a credit application and this will not reduce your credit score.
Never ignore any credit warning letters even if they are for very small amounts. Unpaid parking fines are a classic example of this. If there is any bill that you think you need not pay, challenge it, have it agreed that you need not pay it rather than just ignore it. If the service provider takes legal action and gets a county court judgement (CCJ) then this will affect your credit score very heavily.
If a service provider bills you for more than what is due from you, never take this lightly. In view of maintaining your credit score, I would recommend that you pay the excessive bill first and then challenge the excessive bill and have a refund. This way your credit score will not be affected.
Never challenge a mobile phone company and say Do what you can. Its best to resolve your issue with them, they can potentially ruin your credit score and spoil all chances of getting a loan, since a contract mobile phone is a credit account and if they register a default then this impacts your credit score heavily.
Check your credit score periodically especially if you are planning to take out a mortgage in the near future. Keep tracking your score and also ensure there is no wrong data attached to your file. A common example of wrong data attached to your credit score would be if unknown data of a person with a similar sounding name has been attributed to your score.
If you are ever denied credit, never take chances and try elsewhere, the best thing to do is to check your credit score and understand this before attempting again.
It always helps to be registered in the electoral roll. This is much more important than one thinks. There are some lenders who will not lend money to those not on the voters roll. The longer you are registered on the voters roll the better it is.
Being reachable on a landline telephone as opposed to just a mobile phone is preferred by lenders and this can help you have a better credit score than not having a landline telephone.
Never lend your name to anyone for any reason. Often you will want to help a friend and for instance get him a contract mobile phone on your name and guarantee that he will make payments on time. But if he does not this severely affects your credit score.
Similarly if you allow others to use your residential address for banking purposes and should they not keep up the credit commitments, this would also have a fair impact on others in the address especially if the person runs away without paying his debt.
Avoid using your credit cards up to the limit. If you have a credit limit of 2,500 the lenders like to see you leave at least about 25% of it unused to show them that you are in control of your finances.
Lenders like to see long history in credit applications. If you have been having a bank account or a credit card for a very long period of time, think twice before cancelling it, a long standing account is good from a credit score point of view.
Do not have more accounts than you need or can manage. Some of us have the tendency to have several bank accounts. This is both difficult to maintain and does not add any value to your credit score, its ideal to have one bank account and transact all of it through that.
Avoid the temptation of having too many credit cards. Think twice before applying for one. Consider cancelling credit cards especially if its unused and you dont see that card being needed in the near future.
When you change your address, notify this as early as you can and ensure you notify all credit accounts. From a credit score point of view it is not good to have credit accounts registered to multiple addresses at the same time.
Its best to avoid making credit applications just after you have moved address. Its best to make any application 4 6 months after you have moved into your new house. Even if this is for something as small as a contract mobile phone.
Its best to pay off the loans from savings if you have any. This is for two reasons. The interest you will get on savings is going to be much lesser than what you pay on your credit account and also since the credit report does not carry information on your savings account, the lenders cant see how much savings you have. If you can use this to reduce the loan shown, it will work to your advantage.
If you are going through any kind of financial trouble, dont suffer in silence, speak to the lenders. Explain your situation and see if you can agree to something mutual and they dont report this on your credit score. If you have been paying back well many lenders should be willing to agree to something mutually acceptable.
by: Tony
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