How to repair a bad credit rating

A bad credit rating will normally be the result of -

1. A series of bills being paid late, and/or
2. A Default or County Court Judgment (CCJ) being lodged against your name

Improving a credit file depends on how bad your rating is. For example, if it's only because of wrong information or a load of bills been paid late, that's relatively easy to sort out.

But unfortunately it's hard and can take time (but is not always possible) to sort out problems caused by a Default or CCJ, but see this link for some ideas.

1. Your personal details, name, date of birth, address etc
2. A list of your present financial commitments that involve credit, so details of your mortgage, credit cards, loans, bank accounts and mobile phone contracts etc
3. A list of your historical payment records, ie how have you been paying your bills, on time, late, never etc. This will also include details of any defaults or CCJs (County Court Judgements)

Interestingly what is not taken into account are your assets or salary/income. So theoretically it's possible for somebody who is unemployed to qualify for a £2,000 loan whereas a well-paid Dentist earning £150k a year might be refused.

The unemployed person has a good credit rating because bills have been paid on time and he hasn't defaulted on any loan commitments. But the Dentist, as successful as he is, is also chronically financially disorganised. So most of his monthly bills get paid late, plus 3 years ago he defaulted on a credit card debt (he didn't open his mail and forgot to pay it after several months).

A credit rating is used to predict the chances of you making payments -

• If a friend borrowed £100 from you and said they'll pay you back in a week but kept making excuses before paying the cash back in 6 months you'd probably be wary about lending to them again in the future
• But if another friend borrowed £100 and paid you back the next day, the chances are you'd have no problem doing business with them again

The first person in your opinion has a bad credit rating, the second person a good one. And there's little difference in the example when it comes to the banks and mortgage companies agreeing or not agreeing to loan us money.

Conversely, you also 'earn' a bad credit rating. And this will normally be because you either kept paying your bills late, or didn't pay them at all.

In effect your credit rating is used by potential lenders to predict your chances of -

a) making the monthly repayments on time, and
b) paying the debt back in full

All of them are required by law to send you a copy of your credit file for just £2. But watch it because on their websites they'll all try to divert your attention to signing up to one of their expensive monthly plans which for most people is totally unnecessary.

Put simply, most people need access to their credit files 1-2 times a year, not every week/month.

How to read your credit file

Personally I've dealt with both Experian and Equifax and hats off to them as when you receive your credit file you'll be provided with plenty of material to help you get a better understanding of what you're reading.

Plus, they include a telephone helpline. I've only spoken to Equifax's, and again I was impressed, the people on the other end of the phone were both helpful and knowledgeable.

What to do if you've got a healthy credit file

If your credit rating is good then congratulations (if not see below) you are in a powerful position as I indicated in the introduction because you have financial options open to you whether you choose to use them or not.

All you have to do is keep doing what I suspect you've already been doing - pay all bills on time. And I define on time as at least 1 week before the due date as that allows time to sort out any problems or errors.

Repairing your credit rating is a two-stage process -

Stage one

Once you have your credit file look closely at both your personal and financial information to see if there any mistakes. Perhaps they've spelt your name wrongly, or you're listed as living at 12a High Street when it's actually 12b, or perhaps you have a loan for £3,000 with Natwest but it's listed as £5,000.

To correct any mistakes ask for guidance from the credit agency's website/helpline (the agency who you ordered your credit file from). I repeat that I have found these helplines to be excellent.

Make sure you're on the Electoral roll

Remember a lender will use your credit file to try to assess your future ability to repay a credit agreement on time and within the agreement's terms. And one dominant factor to try to determine whether you're a good risk or not is to look for stability.

And that's common sense isn't it. Most of us would rather do business with people we view as stable, rather than unstable.

A good sign of stability therefore is whether you're registered on the Electoral Roll. Most good citizens are, even if they don't vote.

So if you're not registered to vote and want to improve your credit rating, start the process of registering on the electoral role.

Why checking the two main Credit Reporting Agencies makes sense

With so much data collected and being added to millions of personal credit ratings daily it's no surprise that many entries are wrong. So if you spot a wrong entry with one agency, say Experian, does this mean the other main agency, Equifax also carries the wrong data? Probably yes.

It's therefore good advice to order your file from both main agencies (and possibly CallCredit as well) to make sure they're both correct.

Stage 1 summary

This stage has focused on your personal information, checking that all names, address, dates of birth and details of all your credit agreements that appear on your credit file are correct. Plus, it's important to make sure you're on the Electoral Roll whether you choose to vote or not.

Stage Two

Slightly alter your payment habits - Instead of using a debit card or cash for most of your monthly expenses use one or more credit cards.

Most people will use either cash or their debit cards to pay for everyday expenses. The trouble with using either of these payment options is that no credit is involved.

So instead of using your debit card to fill up with petrol, use a credit card. And instead of using cash to pay for a weekly Tesco shop use a different credit card if you can.

By using 1 or more credit card every month you're borrowing money every month. And if you repay the monthly balance in full when the statement comes a positive repayment tick gets entered on your credit file. Keep this up for 6-12 months and it can work wonders to improve your credit rating.

This is because you're building a positive financial history which states -

• This person is borrowing money every month and repaying it - and that's one of the hallmarks of responsible financial management

Important - you are using these credit cards for a specific purpose - to improve your credit rating, you are not using them for credit and therefore unnecessary debt.

What if you can't qualify for a Credit Card

Chances are you can qualify.

There are now specific cards on the market aimed at people with bad credit, even those with Defaults and CCJs. One of these is the Vanquis Card.

The credit limits on this Card are small, usually no more than £500 ( this is a good thing) and the interest rate is high, around 40%. But that is of little concern as the Card should not be used for borrowing money.

I would also advise applying for the Vanquis card if you already have a Credit card. Having 2 or more cards is an advantage when trying to rebuild your credit score.

Two or more cards means that every month more borrowing and repaying can be done. And this in turn will lead to more positive marks being made on your credit file.

• Vanquis Credit Card website

1. Correct errors + registration on the Electoral Roll - should take no more than a month
2. Borrowing money via your Credit Card(s) every month - and repaying these debts before they're due, and
3. Time and patience - Sadly this process cannot be speeded up so give it 6-12 months to work

Plus, if you have a mortgage, a mobile phone contract (not Pay-as-you-go) or any other financial commitment (perhaps a sofa on the HP), it's critical to make sure all those monthly payments get settled on time. When it comes to improving your credit score, on time means the payment goes through at least 1 week before the official due date.

Finally there is another long-term benefit to cleaning up your Credit File - you now understand what it is, and why it's so important. And once you realise this you should do everything possible in the future to keep it nice and clean because -

With a clean credit file you have financial options......

See also

• Want to really improve your Credit rating - Then start building new financial relationships