Six months to improve your credit rating

Posted on: 14 April 2009 by Gareth Hargreaves

If you believe everything you read, then you'd think it was almost impossible to get a good deal on credit.

Fortunately, that's not true. If you have a good credit rating, you can still qualify for some great deals - whether you want a credit card, loan, mortgage or simply the right mobile airtime package.

Follow these tips and you could see a real improvement to your credit rating in just six months.

Month 1: getting started

When lenders decide whether to grant you credit and what interest to charge, they calculate your credit rating, also known as a credit score, to assess the likelihood that you will repay what you have borrowed.

They do this by allocating a value to items from your application and your credit report - the personal history of your credit accounts, such as loans, cards and mortgages - and adding them up to get a single number. In general, the higher your score, the easier you'll find it to get credit.

You don't have a single credit rating, as every lender uses a different formula. Your credit score also changes over time, as your circumstances change.

Check your credit report

It's crucial that your credit report is current and accurately reflects your circumstances, so lenders don't turn you down or lend more than you can really afford to repay. Start by getting an overview of your credit accounts and how well you're managing them.

It's an urban myth that your credit rating suffers every time you look at your own report. In fact, checking your credit report regularly could help you to manage your finances better and build a better credit score.

Month 2: addressing the details

The electoral roll is used to confirm that you live where you say you do - you may lose points if you don't appear and lenders may ask you to provide further proof of residence or even turn you down.

Set the record straight

If you find any discrepancies on your credit report, such as an account that is closed but is listed as open or a late payment that you know you made on time, get in touch with the relevant lender and explain the problem. Be prepared to provide proof and ask them to amend the entry.

Month 3: give yourself some breathing space

Look for 0% balance transfer or spending deals on credit cards, which will give you some breathing space while you sort out your finances. But remember to set up a direct debit to cover the minimum monthly repayment and to save to pay off the balance in full when the introductory period is up.

Close unused accounts

Target unused accounts listed on your credit report and close them down. Lenders take into account the amount you could borrow when they decide what to offer you. Lower that total and you could increase your credit score.

Month 4: rationalise your borrowing

If you have a tracker mortgage that has benefited from the record lows in interest rates, then consider making additional repayments. This could leave you better off rather than using the surplus to repay other debts.

Check first that you won't be penalised for any early repayment on your mortgage if you're close to paying it off in full.

Search through your bank statements and work out which of your accounts costs you most in interest.

Do some research to see if you can roll these accounts into a single, less expensive loan. If that's not possible and you have spare cash, use it to pay off tge most expensive debts first.

You'll be better off than if you keep the money in the bank and, as your balance falls, your credit rating could rise.

Month 5: explain yourself

Past financial problems such as missed repayments stay on your credit report for at least three years, while IVAs and bankruptcies are there for a minimum of six years.

If there are special circumstances to explain why you got into trouble, you can ask to add a note of explanation that will be seen by lenders. For example, you might have had an accident and skipped a few repayments but have never had any problems before or since.

Sweep up your footprints

Every time you make an application for credit, the lender will search your credit report and leave a record known as a footprint.

These stay on your credit report for 12 months and a lot of these in a short period of time can make lenders worry that you're desperate for money or even suspect a fraud is being planned.

So if you spot something listed on your credit report as an application when you were only asking for a quotation, contact the lender and ask for it to be removed. When you want to know what kind of a deal you can get, be careful to ask for a quotation search that won't leave a footprint on your credit record.

Month 6: final steps

ID fraud is one of the fastest-growing crimes of the 21st century. ID fraud occurs when a criminal gets hold of enough of your personal data and to pretend they're you: taking over your accounts, borrowing money in your name and trashing your credit rating in the process.

When you check your credit report, look out for unfamiliar transactions or applications and tell the lender immediately if you think you're a victim. The Home Office recommends this as an effective protection.

Update your relationships

One section of your credit report lists your financial associates. These are people with whom you have a financial relationship, such as a mortgage or joint credit card account.
Lenders may check the credit reports of your financial associates when you apply for credit, as their situation could affect your ability to repay what you borrow. Ensure your list of associates is current, or you could be penalised for someone else's financial problems.

It's always best to close joint accounts when a relationship ends.

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