• Advice, tips and hacks to help you make the most of your finances and everyday life. Brought to you by First Quality Finance                              Back to Main Blog

  • Rebuilding Your Credit File

    When it comes to credit, you either have good credit or bad credit. Bad credit will be the topic of discussion in this post, where we’ll see how a person can develop a poor credit profile, what it means and how you can rebuild their credit profile or access loans with a poor credit rating through a bad credit lender.

    What is a Bad Credit Profile?

    In general, a poor credit rating ideally describes a person’s past failure to keep up with their credit agreements, and their inability to get approved for new credit. A decline in a credit rating means that the person hasn’t paid their previous credit obligations in time, or that they haven’t paid them at all.

    Various companies or credit bureaus/reporting agencies collect your credit account history and record it on a credit report. When you have a lot of negative information on your profile, such as loan defaults, late payment, etc. on your credit report, it means that you have a bad credit profile. You may also have had your account charged with high balances, sent to a collection agency, filed for bankruptcy or even had your car repossessed.

    Multiple cases of such scenarios usually lead to bad credit, especially when they occur within a short range of time. Some of the negative events only need to occur once to make lenders sceptical about providing you credit. These include repossessions, bankruptcy, and defaults. All the information in your credit report is used to calculate your current credit score, which tells potential lenders if you have paid on time. This is shown on your credit file using numbers and some letters. Credit scores usually range from 300 to 850, with 300 representing the lowest credit possible and 850 the highest.

    Nonetheless, each lender has a unique system in place to award a credit score, and there’s no such thing as a universal credit score. Credit reference agencies have their version of your credit score, and the higher the number the number, the higher your chances are for getting the best credit deals. Confusingly, the scale differs for each agency, where a score of 560 might be considered “very poor” in one, and “Excellent” in another.

    What affects your Credit Score?

    A credit score is determined by how well a person utilises their credit facilities. For instance, if you fail to pay a bill on time, its recorded on your file, and in turn, paying your credit agreements on time is also noted to inform other lenders you can keep to your credit arrangements.

    Keep in mind that the timing of entries in your report is much more important than the type of activity. Most lenders will be more interested in your present financial situation, meaning that a missed payment from a few years ago will be unlikely to ruin your chances of getting credit.

    Implications of a Poor Credit Profile

    With bad credit, lenders are much less likely to lend money to you, since they suspect you may fall behind on your payments for a loan, credit card or any other credit facilities. As such, it is likely lenders may turn down your application, and if you do get approved, you will be charged a higher interest rate compared to the borrowers with a good credit score.

    Besides your loan approval and interest rate, a bad credit rating also affects your insurance rate, as insurance companies use your credit score to determine the best insurance rate for you. Applicants with bad credit also get charged a security deposit by some mobile phone and utility providers. Landlords can also demand a high-security deposit from tenants with bad credit, and could even turn you down for an apartment altogether.

    Some jobs, especially those in the finance industry or upper management roles require that you have a good credit history. Due to this, you could be turned down for a promotion or a new job just because you have some negative items on your credit report, especially bankruptcy, high debt amounts, or large outstanding bills. Don’t forget that most employers check your credit report and not your credit score. They won’t be checking for bad credit necessarily, but for things that might affect your job performance.

    You may also experience difficulty starting a new business or buying a new car. A bad credit history might limit the amount you can borrow to start your business, even if your business plan is solid, and you have data supporting your business success. Similarly, you may get denied a car loan, or get a high-interest rate, leading to higher monthly payments.

    How to Fix your Credit Score

    1. Watch your Credit Balance Carefully

    Your credit score is largely determined by how much revolving credit you do have in comparison to how much you’re using. In general, the smaller the percentage, the better it will be for your credit score. The ideal percentage is 30% or lower.

    Be sensible and start to clear your balances, and keep these balances as low as possible. In case you have some credit card balances, consider consolidating them via a personal loan, which can considerably help your score.

    Don’t forget that even if you’re fully paying your balances each month, you might still have a higher ratio of utilisation than you might expect, since some issuers check the balance on your statement as the balance conveyed to the bureau. So, even if you fully pay your balances each month, your credit score will include your monthly balances. In this case, find out if your lender or credit card issuer can accept multiple payments throughout the month.

    2. Regularly Check your Credit Report and Correct any Mistakes

    Be sure to check your credit report at least annually, to ensure that all information contained on it is correct and updated. In case you notice any mistakes, get them rectified as soon as possible. You will then make sure that they don’t hurt your future credit applications. Contact the credit reference agency itself, or the company that has provided the incorrect information to investigate on your behalf.

    3. Make sure you’re on the Electoral Roll

    Registering to vote can considerably better your chances of getting credit. Most lenders use this to confirm that the address information you have given out in your application is correct. You can register to vote online through the official Register to Vote website.

    4. Think Through your Credit Application

    Understand that an application for credit will leave a footprint on your credit file, and this will be visible to the other lender. So, if you have been recently turned down for a credit application, it’s not wise to apply for another loan or credit card immediately. Making multiple credit applications over a short duration might suggest to the lenders that you are in some financial difficulty, and this will eventually make them hesitant to let you borrow.

    When you’re looking to get new credit, it’s wiser to ask lenders to perform a “soft search” instead of a full credit search. You will then be given sufficient information to determine if your application will be accepted or rejected, and the interest rate you’ll most likely be charged. Plus, it won’t be visible to lenders on your credit report. The soft searches are carried out with mortgage applications, especially by people shopping around for the best deal.

    It’s also worth noting that applying for credit immediately after changing your job or moving house can affect your success rate. The lender wants to see the evidence for stability when considering credit applications, and if you have just changed your address or have not been in the same job long enough, it could count against you.

    5. Take Advantage of your Rental Payments

    If you’re a private tenant who pays their rent on time, you can use these payments to improve your credit score through the free scheme referred to as the Rental Exchange. You pay rent to a separate third party such as Credit Ladder, who will, in turn, pass the money onto the letting agent or landlord, and then lets the lenders know that you have paid on time. This data will be visible to the lender by the end of the year, so you can start having your payments recorded on your file.

    6. Leave Old Debt on your Credit Report

    Many people speciously think that having an old debt on their credit report is bad. And once they get their car or home fully paid off, they’re quick to get it removed from their credit report. Well, negative items will be bad for your credit score, and more of these typically disappear from your report after several years. However, getting old accounts removed from your credit report just because they settled is not always a good idea.

    Good debt management, which shows that you have previously handled debt well is good for your credit. In fact, the longer the history of your good debt, the better it is for your score. So, leaving old debt and other good accounts on your report for as long as possible is one of the best ways to improve your credit score.

    How to Get a Loan with a Bad Credit Score

    Admittedly, it takes some time to rebuild bad credit, and ironically, you might need a loan to get your finances back on track. So, how do you do it when all the lenders seem to be shying away? Well, there are a few credit options for people with bad credit. The most important thing, however, is to make sure you pay back on time to slowly rebuild your credit rating again.

    Using your Car or Home as Equity

    You can use your car or house to secure a loan. A lender will be more willing to offer you a loan when they have a security blanket. So if you default, they can recover the amount from the equity. The biggest challenge with this option is, of course, the risk of losing your car or home if you default.

    Joining Credit Unions

    Some cities or towns have credit unions, also called cooperatives, which are simply lending companies owned by the borrowers. These are more lenient regarding qualifications and requirements than the mainstream lenders. They usually rely on your original cash deposit to become a member, rather than your previous credit history/record. The interest is also quite permissible, and your cash will be earning interest as you co-own the lending union. The main drawback with this option is that you have to put up cash before you are qualified for a loan.

    Online Loans

    There are many lenders online these days, who are more than willing to offer credit for people with a poor credit profile. All you need is a steady income such as your job and bank account to go past the approval process. These lenders are not interested in your credit history, but you are paying them in the coming months. The main drawback is that they typically charge stiff interest and penalties. So, be sure to pay on time to avoid any more fees by these lenders.