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Emergency steps to improve a Credit Rating

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Want to improve your credit rating? Consider using a low-limit Credit Card as a strategy of monthly borrowing and repaying. It works wonders. Find out more.
Page Summary:
If you've got a bad credit Rating because of a Default or a CCJ, then consider following these strategies. They will work wonders over the months and years but patience is needed. This articles explains in more depth.
If your current credit file is in a bad shape, usually because of a Default and/or CCJ (County Court Judgment), and you have not been able to get it removed then the most positive approach is to -

  1. Accept the default/CCJ will be with you for 6 years (from the time it was issued)
  2. Then do everything possible to start improving your credit rating, and
  3. Start as soon as possible because time is very important
This article lists some tried and tested strategies that anyone can use to markedly improve their credit rating. They're all easy to follow but you have to be patient as there are no short cuts available.
Why time is important
A lot of the important information that goes into a credit report deals with your payment history. How for example have you been paying your monthly bills -
  • Always on time
  • Generally on time but sometimes a little bit late
  • Normally always late, and if so by how many days or months

Anyone can pay this month's bills and the next one on time - but does this tell you the whole story? No, because the important point, and what has an impact on your credit rating, is how have you been paying your bills over a multi-month period.

This is why the necessary steps to improving your credit file cannot be carried out over a few months.

Step 1: Start building new financial relationships
This step and the following ones are all designed to build you such a positive credit history the negative effects of a Default or CCJ start to get massively diluted.

Whether you have a current bank account or not I advise you to open a new one.

However, many banks will refuse to open a standard bank account as they'll always run a credit check. So if yours is bad the answer will almost certainly be no.

But Natwest has an excellent bank account, called the STEP account (see link below), which is specifically designed for people with bad credit. It's the most basic account available and only comes with a Debit/Cashpoint card. The account offers no chequebook, no overdraft facility, and certainly no credit card.

Open the account and make sure your monthly pay/income goes into it and then run it responsibly. Operate the STEP account in this fashion and within 1 year you should be offered an upgrade which comes with a chequebook.

Keep running the account in a responsible manner and within 12-24 months you should be offered an overdraft in the £500 - £1,000 region as well as a Credit Card.

What this step is achieving
A number of different things are happening when the above strategy is followed.

If you've read Credit Files - The Basics you'll know a personal Credit File doesn't take into account your salary/income or spending habits. However, the banks use 2 separate credit ratings -

  1. Your official one (the one you can obtain from Experian or Equifax), and
  2. Their own in-house scoring system which looks at how you've been conducting your financial affairs with them

Like a standard credit file one of the things this in-house scoring system will look for is responsibility. By using the strategy above - opening a STEP account and running it in a responsible fashion - you'll be building a solid internal credit rating with Natwest.

This is the reason why over a 1-2 year period you should be offered upgrades and further products such as an overdraft facility and also a Credit Card.

It's common sense isn't it as the more good banking you do with Natwest the more comfortable they'll be in not just in continuing the business relationship but also expanding it (chequebook, overdraft, credit card etc). It's like a snowball effect, the further you head downhill the bigger/stronger you become.

Why the overdraft and credit card are important
Natwest will automatically send details of how you run your account(s) to the Credit Reporting Agencies such as Equifax and Experian. So if they offer an overdraft and a credit card that's 2 more credit agreements signed which will appear on your credit rating and that's a good thing.

So although you'll still have a Default or CCJ the negative effects of these are slowly being eroded away by all the positive actions that are taking place.

Plus, don't forget the actual date of the default is taken into account as well and this starts to get diluted overtime. For example a default issued in 2009 still carries a lot of negative weight in the year 2010 but less in 2011, 2012 and so on.

Try to enhance your relationship with Natwest
Work hard at keeping your positive relationship with Natwest and if possible try to do further business with them. For example -
  • If your household or car insurance is up for renewal get a quote from Natwest
  • Perhaps they'll quote £225 but Norwich Union are at £200

I would advise you pay the extra £25 and go with Natwest as this would further strengthen your relationship and these details will be added to your internal Natwest credit rating which will only help.

Step 2: Intelligently apply for and use more credit
It's a myth that people with bad credit are automatically refused all Credit Cards. Most people can still qualify but they can't always choose the cards they want. Instead they have to apply for a specialist Card that is designed for people with suspect credit ratings (see below for more details).

Yes, these cards all have high interest rates, usually around 30% - 40% but this is irrelevant because they're not going to be used to borrow money.

Instead a new credit card has 2 specific purposes -

  1. To sign another credit agreement, the details of which will appear on your credit file (that's a good thing), and
  2. To use the card to borrow every month and then repay on time every month, hence lots of lovely positive repayment ticks will appear on your credit file
Important: It's imperative to get organised when paying the bill

I define 'paying on time' as paying at least 1, and preferably 2 weeks before the official due date.

This means any problems can easily be sorted out in time. Remember, the last thing you want is for a late payment mark to go on your credit file. See number 8 of our Top 10 Secrets of Good Personal Finance which states -

10-30 minutes a week - all you need to be financially organised

Which Credit Card(s) to apply for
It's a myth that people with bad credit are automatically refused all Credit Cards.

Most people can still qualify but they can't always choose the deal they want. Instead they have to apply for a specialist Card that is designed for people with suspect credit ratings.

Yes, these cards all have high interest rates, usually around 30% - 50% but this is irrelevant because they should not be used to borrow money.

Instead a new credit card has 2 specific purposes -

  1. To sign another credit agreement - the details of which will appear on your credit file (that's a good thing because a financial company is happy to do business with you), and
  2. To use the card to borrow every month and then repay on time every month - hence lots of lovely positive repayment ticks will appear on your credit file

The Capital One Classic Card

Great for people who want to build or rebuild their credit rating. Before you apply, check you're eligible because you're more likely to be accepted if -

  • You're over 18
  • You have some history of managing your credit even if you have had CCJs or defaults in the past
  • You are on the electoral roll

More details and to Apply

The Vanquis Card

  • It's Visa branded so is accepted across the world
  • Simple online application process
  • Representative 39.9% APR variable

Although it's normally very easy for people to qualify there are a few restrictions -

  • You haven't applied for a Vanquis card in the last 6 months
  • You're able to verify your address (e.g. bank statements, utility bills, landline)
  • You're not in the midst of declaring bankruptcy
  • You're registered on the electoral role - See how do I get on the electoral roll
  • You're 18+

If you fulfill the above then you should have no problems in qualifying for the card.

More details and to Apply

If you apply and are accepted for one of both of these cards I'd advise you use them in the following fashion -

  • Alter your spending habits and instead of paying by debit card for a tank of petrol or weekly shop, use the credit card
  • If you've got more than 1 card then try to spend at least £25 on every card, every month
  • Then, make sure these balances are paid in full and on time (remember 'on time' means 1-2 weeks before the official payment date)
Step 2 summary
The goal of this step has been to create 1 or more new credit agreements and then create more of a positive financial history. Borrowing money every month, regardless of how much, and repaying it on time gets you one of those lovely positive marks on your credit file.

The more positive marks, the more positive history on your accounts, and the more your negative history starts to get diluted.

Step 3: Apply for yet more credit
After following the first two steps for 1-2 years and assuming Natwest has started to offer you more financial products (this will mean your credit rating is getting better) consider applying for more credit. Here are a couple of ideas.
Idea 1: Buy something like a £100 DVD player in Curry's on credit
You want to try to buy something that's not too expensive via a hire purchase agreement which most of the larger electronic retailers like Curry's or PC World offer.

Buying a DVD player for £100 and financing it over 1-2 years is obviously an expensive way to purchase a product but in my opinion it's worth it. This is because you'll be signing yet another credit agreement and will be making yet more monthly repayments. Both of those will help continue to strengthen your credit file.

But you're dealing with a finance company
If you've read the introduction to Credit Files you'll know the quality of the lender is considered when determining someone's credit rating. For example -
  • The big banks are all viewed as blue chip lenders - open a credit account with them and it can only help your rating (assuming the account is run responsibly)
  • But open an account with a finance company (specialist money lending firm) and these are viewed as suspect and can hurt your credit rating

The reason for this is because banks on the whole have quality customers. Whereas a finance company's customers are viewed as suspect because traditionally the less well off have used them. It sounds harsh and it probably is, nevertheless we must be aware of this credit file subtlety.

How do you tell whether you're dealing with a finance company? It's simple - see who the company you're signing the credit deal is with - if it's not a high street bank or other big name brand, odds-on it's a finance company.

Why I advise signing with a finance company
If you sign with a finance company your credit rating has a good chance of taking a small knock, and that's a negative. However, it will also receive 2 positives -
  1. Another credit agreement will have been signed, and
  2. More monthly positive repayment ticks will appear on your credit file, further diluting your negative history

So as I look at the situation it's 1-step back (signing with the finance company) but then 2 steps forward (another credit agreement + positive payment history) for a net positive result.

Of course, if your credit rating is currently fine, then I wouldn't advise signing a credit agreement with a finance company and that includes most if not all of those 0% Sofa and furniture adverts you see advertised on TV.

Important: Watch it if you get refused credit
This is a very important point to note.

When you apply for any credit agreement - mobile phone contract, loan, credit card etc the company will run a credit check on you. When this check is run a small 'credit inquiry' entry will appear on your credit file, whether you get accepted or not.

One maybe 2 of these entries over a short period of time is never a problem. But any more and it starts to look like the person is desperate for credit.

For example, most people with good credit files will apply for a loan or credit card once and then get accepted. But someone who applies 4 times within a month suggests they've been refused 4 times and therefore this will automatically have a damaging effect on your credit file.

My advice is therefore simple - if you get refused credit 2 times over a 3 month period don't even think about applying for any further credit for at least the next 6 months, and preferably a year.

Go for small items - you've probably got more chance of being accepted
Another point to consider with this idea is to try to buy a small ticket item, under £100. Then I think you'll have more of a chance of getting accepted rather than if you try to buy a £500 TV (not that you should be looking to finance such an item in this way anyway).

Summary - The point of this exercise is not to go crazy taking out new credit for TVs, entertainment systems, computers etc. It's to borrow a small amount of money with a view to using the loan to improve your credit rating.

Idea 2: Buy some socks from the Catalogue companies
Perhaps not socks, but another good tip and one which people have found helpful in the past is to buy some goods via Hire Purchase from the catalogue firms like Littlewoods or Grattons.

Most people need a few things replacing in their kitchens like a toaster or kettle so try to buy £50-£100 worth of goods and set up an agreement with them to repay the money over 1-2 years.

Yes, the interest rate of around 30% is scandalous but on £100 over 2 years it's probably no more than £40. And £40 to help improve your credit rating is a cheap price to pay. Plus, you get a few new things for your home.

Be careful though as all of the Catalogue firms are excessively vicious when it comes to dealing with bad debts. Don't think about messing them around for one moment, even over sums of less than £20 as they'll have no qualms lodging a default against your name for that amount.

Summary - Again, the point here is not to buy a load of new toys or other goods but to obtain a small amount of credit to repay over 1-2 years, so further improving your personal credit file.

Tip: Try to talk with a Manager first before applying for credit

Before you buy anything try to talk with a manager or assistant manager about your credit file. Explain you want to buy £100 of goods on credit but you have a default or CCJ on your credit file.

Then ask what the chances are of getting accepted are. If they say there's little chance then don't try because you'll get an unnecessary credit enquiry on your file.

The trick to making all this work - Internet banking
A high proportion of people with suspect credit files are financially disorganised. So it's not so much a case of wrecking their credit files by a debt problem rather because they are chronic late payers. And in some cases this can lead to defaults etc.

But internet banking can do wonders for anyone's personal financial management because it's so quick and efficient and of course it's available 24 hours a day.

The best and simplest way to get on top of your finances and stay on top is use a strategy called 'batching'.

I use batching to keep my affairs organised and takes between 10 - 30 minutes a week. This is how it works -

  1. Time: Set aside 10 -30 minutes every week, same day, same time. A Saturday morning is a good time
  2. Dump: Throughout the week dump all bills, statements and the like into an old shoebox
  3. Internet: Once per week log on to your internet bank and check your balance
  4. Settle bills: Pay all bills that are due in the next 2 weeks
  5. Check: Finally, check the previous bills were paid
Follow these simple guidelines - they're part of our Top 10 Secrets to Good Personal Finance - and anyone who's presently financially disorganised will be amazed at their quick transformation into someone who's on top of their game.

Late Payment Warning - If you use some of all of the strategies on this page to help improve your credit rating but fail to pay bills and statements on time because you're financially disorganised your credit rating will always struggle to improve.

Internet banking is therefore the oil that keeps all these credit improvement strategies working and operating smoothly.

Finally, if you're worried about the safety of online banking read this article - 3 Easy Steps to Safer Online Banking

Think positive - the good news about having a bad credit file, and getting motivated to do something about it, is the worst is behind you - the only way is up!

So start building those new financial relationships and work hard at creating the best positive financial history that you can possibly do. Then, after 6 months things will have slowly started to improve and within 12- 24 months your credit file will score so much better than it does now.

I know this to be true because I've encouraged countless people with bad credit ratings to follow the same strategies outlined here. And for every person who has followed them diligently, and worked hard, the results have been excellent.

Finally, don't forget that nobody is automatically given a good credit rating - you have to earn one. You've therefore got to get proactive by -

  1. Understanding exactly what a credit file is and how they work
  2. Requesting a copy of your own file and correcting any mistakes as well as registering on the electoral roll
  3. Start developing new financial relationships as soon as possible
  4. Try to obtain more credit over the next 6 - 24 months and use the accounts every month
  5. Being and staying financially organised
Good luck
Postscript - What about applying for a mortgage
I have received many emails in the past from people asking that if the strategies listed above will mean they'll qualify for a mortgage with a competitive interest rate.

Of course there is no one size fits all answer but I'm telling the people the following -

  • If they walked into a bank or building society with a default or CCJ on their file there's a 95%+ chance that you'd be refused any mortgage because -
  • a) your credit file, and
  • b) you have not developed a financial relationship with that bank

  • But if you've taken the time over 2-3 years to build a relationship with a bank I think you will have a great shot at being able to sign some sort of mortgage deal

  • It won't be the best but it won't be the worst either

  • Then once the default/CCJ has expired (after 6 years) I would strongly advise you to renegotiate the mortgage as chances are you're qualify for lower interest rates
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  • One secret to improving a credit rating is to improve your repayment history
  • Certain Credit Cards can used, most can qualify even if your credit rating is bad
  • Use them for small monthly purchases, then repay that month
  • The strategy works wonders - Read more

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