Bad Credit Ratings Affect Us All
Just as the world is warming up, the credit climate has undergone a profound change since the recession took hold as many of us find we have bad credit records. According to the latest Bank of England figures, around 1.6 million of us apply for some form of credit every month, from loans and cards to mortgages – and nearly half are turned down for having a bad credit rating. Many of the successful ones have to pay stiff interest rates.
Under these circumstances, it’s as important to protect and nurture your credit status as it is to lower your carbon footprint with a bad credit record. You’ll find some credit saving tips below.
Your credit report is the history of your credit accounts, along with your repayment history and other information that helps lenders to decide whether to make you an offer and what terms – such as interest rates – to set.
Lenders look for evidence that you are a reliable borrower who makes your repayments on time and in full and isn’t already maxed out or that you have bad credit ratings. A clean report that shows you can comfortably manage further borrowing is more likely to get you the deals you want.
- It’s free to see your credit report online with the credit agencies
- Check that everything in your credit report is up to date and accurately reflects your circumstances and you have no bad credit ratings on your record
- Look for any errors and ask the relevant lender to correct them – you’ll need to provide proof
Bad Credit Ratings – Understand credit scores
Your credit score – also known as a credit rating – is the key to the offer you’re after.
Lenders take items from your credit report and your application and allocate each one a value. The total is your credit score. In general, the higher your score, the easier you’ll find it to get a good deal on favourable terms. Bad credit equals a lower credit score equals the worst interest rate.
- You don’t have a single credit score, as every lender uses a different formula – some even use different calculations for different products, so you could get two different results if you applied to the same lender for a card and a loan
- Your credit score changes over time, as your circumstances change
- You can get an idea of the impact your credit history has on your chances of acceptance by ordering a copy of your a Credit Report
It’s now much more difficult to qualify for the most desirable cards if you have a bad credit history. They include the dwindling number with 0% balance transfer – there are just 24 of these available, down from nearly twice that number a year ago. Other popular cards offer 0% on new spending, a percentage of your spending returned as cash back or low interest rates of around 6.8 per cent a year, against a current average APR of more than 17 per cent. Bad credit ratings will seriously affect your ability to find the best credit card deals.
The average member of CreditExpert has a credit score of 754, which is fair – but might not be fair enough. To be sure of bagging these cards, you should aim to improve your score until it becomes good and tops 880. If your credit score is lower still, you’ll be restricted to a credit card designed for people with a poor rating and may be charged in the region of 30 to 50 per cent APR.
- If your credit history is thin or you have a bad credit rating then consider taking out a card with a low spending limit and repaying the total bill each month – it will help you to build a good track record
- Cancel that just-in-case card you keep for emergencies before you apply for a new one – lenders take into account what you’re already able to borrow as well as what you have outstanding
- Register to vote – the electoral roll is used to verify your address and if you appear at an old address or aren’t on at all, you’ll be marked down
First-time buyer approvals are reported too be up on a year ago, but lenders are still cautious because of the potential for people to default.
Two factors are crucial: having a good credit history and a sizable deposit –the number of 90 per cent mortgages on the market has dipped since July 2007. These deals charge a comparatively high interest rate. In contrast, there are more mortgages available to people with a 40 per cent deposit, up from just 17 in July 2007. You’ll also pay less interest. Bad credit ratings will affect your ability to secure a good deal
So it’s time to get saving.
- Never skip a repayment – it will stay on your credit report for at least three years, warning lenders that you could be unreliable
- If an unforeseen event such as serious illness explains past problems in making repayments, you can add a note of explanation to your credit report
- Check your Experian credit report online before you make an application to be sure that you have done everything possible to make it attractive to lenders
Loans and overdrafts
Half of us were overdrawn at some point in the last year and 17 per cent of us are always in the red with our bank. Most people wouldn’t regard this as a form of credit but it is – and, like all credit, you’ll get the best deal if you take active control of your finances and work on your credit report.
If you know you’re likely to spend more than you have in your account at some point, you should always organise an authorised overdraft, which will not attract penalties and will come with a lower interest rate than if you simply overspend. Remember that your bank has a good overview of your finances and will not be impressed if it knows you’re struggling to make repayments on existing credit accounts. If you take out extra credit and it believes you have overdone it, you may find any existing overdraft is cut back or you could be charged higher interest.
Loans, too, can be cloaked in other terminology, such as the interest free credit available on many items of furniture and white goods. Don’t jump at the first offer you find – do your research at online personal finance sites, in newspaper supplements and magazines, then visit a price comparison site such as www.lowermybills.co.uk to find out what deals are out there and what interest you might have to pay.
- Check through bills, bank and card statements before applying for a loan or overdraft to see if you can cut back on your spending and borrow less
- Don’t apply for several loans in the hope that you’ll get one acceptance – or you’ll leave a trail of searches on your credit report that could make other lenders think you’re desperate or suspect a fraud.
- Scan your credit report for suspicious or unfamiliar entries that could indicate you’re a victim of ID fraud – if you find anything, contact the relevant lender immediately.
See the Information your Mortgage Lender Will See. View your Free Experian Credit Report Online.
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