When it was announced that the UK was having its credit rating downgraded in late February it was big news, and bad news for the government. It was an event that mirrored the personal experience of thousands of people in recent years, as economic turmoil and financial hardship have impacted their personal credit ratings.
You are more than likely to have heard of credit ratings, and may already have experienced the drawbacks of having a bad credit rating without ever being aware how you can directly influence it.
Our personal credit ratings are very important. They dictate our access to the financial products that allow us to buy a house or car, they go towards determining what interest rates we pay on our credit cards, and how much of an overdraft we can secure from our bank. So it’s important to understand what shapes our credit rating.
We don’t have just one credit rating
Credit ratings aren’t like your national insurance number or heath records – there is no universally accepted rating. Companies like Equifax and Experian are used by many to credit rate applicants and they also give individuals access to their ratings. But every lender you apply to for finance could have slightly different criteria against which they assess an application.
That makes it harder to manage your credit rating, and it’s made even trickier by lenders’ lack of transparency. Against that backdrop, the best thing to do is manage the basics.
What are the basics of your credit rating?
In order to have a decent credit rating, you need to show you can deal with the responsibilities of credit. Spend your life scrimping and saving, rather than take the shortcuts of credit cards or loans, and you won’t have much of a credit rating to show for it when the time comes to buy a house.
Credit cards and loans can be good for your rating so long as you pay them off. If you can show a perfect repayment history then expect a very positive credit score.
While the ability to handle debt is a big plus, having too much debt is just as big a minus. The more debt you have, the less you will be able to take on, as you will be assessed on your ability to keep up with all your liabilities. So make sure you pay off loans and credit card bills. What’s more, close unused bank and credit cards. If you have an unused overdraft or credit limit, they will still be factored into your rating.
What else is good for your rating?
While showing your responsible attitude to debt is key, there are other things which influence your rating that don’t require budgeting and financial management. Being on the electoral roll and having a landline, for instance, boost your rating.
You can challenge your credit rating
You can speak to credit referencing agencies like Experian to get a copy of your credit check. If there are inaccuracies you can apply to get them changed, and even if the agency refuses you can add a ‘notice of correction’ by way of a comment or explanation. Checking your report is essential – the most innocuous error can be the difference between success and failure.
Having a bad rating doesn’t mean you can’t get finance
Applying for finance and then getting rejected will have a negative impact on your rating, potentially establishing a vicious circle of credit. So can you not get loans if you have bad credit? Car finance is still possible with Car Loan 4U, for instance, because they provide a special product for applicants with poor credit history.
If you need finance but are worried about your credit rating, make sure you identify products that are designed for you.