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how to improve your credit rating

Five Steps to Improving Your Credit

If you’re being turned down for credit cards or loans, chances are good that your credit files are in a bit of disarray. For a bank to give you a mortgage, using a logbook to borrow money, or even a small personal loan, you must be able to prove that you are creditworthy. Here are five steps to improving your credit so you can get the loans you need with interest rates you can afford.

pulling credit files

Step #1 – Pull Your Credit Files

First things first, you’ll need to look at the information in your credit files so you know what you’re working with. You will need to contact the three big credit agencies directly to get this information. They are Equifax, Experian, and Callcredit. The law in the UK allows you to pull one report from each agency each year for just £2, so you should be sure to take advantage of this as often as possible.

While you once had to wait for days or even weeks for your files to arrive in the post, this is no longer the case. If you can successfully verify your identity by providing personal information about yourself and answering some verification questions, you can access your credit files online immediately. At this point, you can review the information on your computer, save it to a hard drive or removable drive, or even print it out so you can file it away for future reference.

Step #2 – Check for Discrepancies

According to a 2014 report from a comparison firm called Uswitch, as many as one in three UK credit files contain significant errors that negatively impact consumer’s rankings. Over the course of two years, they asked borrowers to report any mistakes they found. Some 38% of them said they found significant mistakes, which is a bit bothersome, particularly when your credit file dictates whether you can get a credit card, buy a car, or even buy your dream home.

After pulling your credit files from all three agencies, make sure you’ve checked it carefully for problems. If your name is misspelled or your address is incorrect, this is easy to fix. Just make a note of correction. However, if your accounts are incorrectly reported, things may get a little more complicated. You may need to contact the creditor directly to resolve the issue, and you might even need to open a case with the credit reporting agency. They can research on their end and resolve issues you find, but this takes some time. In some cases, fixing errors on your credit files can improve your credit report significantly.

paying off old debts

Step #3 – Pay Off Old Debts

With your credit reports in hand, highlight (or write down) all the old debts you still owe, including those that are currently reported as delinquent. A single account in collections, and in some cases even a single late payment, can adversely affect your credit. Contact these creditors and try to make arrangements to repay those debts, even if you have to make monthly payments. Some creditors may report that you are making payments to resolve the debt; others may not report anything until your debt is paid in full.

If you owe more than you can afford to repay, you have a few options available to you. If your credit is not significantly impacted, you might try to find a debt consolidation loan. This will allow you to repay all your old debts in exchange for one low monthly payment. If your credit has suffered tremendously and you cannot get out from under your debt, even with a debt consolidation loan, you may want to consider bankruptcy. You should speak with a financial advisor and a bankruptcy lawyer to discuss your options.

Step #4 – Get (and Properly Utilize) New Lines of Credit

Now that you’ve managed to fix all of the errors on your credit files and pay off your old debts, it’s time to start focusing on improving your credit report even further. The best way to do this is to make sure you have a few different credit accounts reporting to the agencies regularly. Types of credit accounts that may report include credit card companies, personal banking institutions, auto loan providers, and others.

Credit cards play a huge role in your credit file, and many experts believe they are second only to mortgage payment history in determining your creditworthiness. To give your credit rating the best possible boost, you should utilize anywhere from 25% to 30% of the credit that is available to you, and you should never max out any single credit card. For example, if you have four cards and a total of £10,000 in credit, there are two things to remember:

Never use more than 35% of your total credit available. For a £10,000 total credit limit spread across four credit cards, you should carry balances that total no more than £3500 and no less than £2500. Too little utilization is just as bad as too much utilization.

Never use more than 35% of your total available credit on any given card. For example, assume your cards look like this:

  • Card 1 - £2,000 credit limit
  • Card 2 - £1,000 credit limit
  • Card 3 - £1,500 credit limit
  • Card 4 - £5,500 credit limit

Now, imagine that you spend £1,500 on the first card and another £1,500 on the second card. You’ll have nearly maxed out the first card, which reflects poorly on your credit rating. However, the £1,500 balance on the fourth card is perfect since it falls between the 25% and 35% recommended utilization.

avoid hard enquiries

Step #5 – Avoid Hard Inquiries Where Possible

Once you’ve started getting your credit back on track, it might be tempting to apply for a new credit card with an awesome 0% APR for the first year, or even to take out an auto loan for that car you’ve wanted all year. However, unless you’re absolutely certain that you can afford it – and you’re absolutely certain you’ll be approved – it may be best to hold off until you’ve improved your credit a little more.

Each time you agree to a credit check, a lender essentially pulls a copy of your credit files from one or more of the three major agencies. When this happens, the agency considers this a “hard inquiry”, which can lower your credit rating for a period. The more hard inquiries there are on your credit file, the higher the risk you present to potential lenders. Financial experts say you should keep your inquiries to two or less per year, if possible, and avoid any inquiries at all in the year leading up to applying for a mortgage.

No matter what sort of shape your credit is in, it’s possible to turn things around and change it for the better. Following the five steps on this page is the best way to take care of old debts, prepare for new ones, and prove your creditworthiness to potential lenders for the rest of your life.

Please note: The content provided in our blog posts is for informational purposes only, and does not constitute lending advice, nor does it claim to portray the actual lending experience accurately.