Most of us have been in the situation where we've been declined credit. It's not the best feeling in the world, is it?
While it can be inconvenient and embarrassing to be told that the "computer says 'no'", it helps to understand how credit scores work. If you know that information, you can work out how to improve your credit rating for next time.
Your credit score will vary between banks and building societies. That's because they all use different methods of calculating it, based on their own analysis of your credit history. Your credit report will list your credit accounts such as store cards, credit cards, mortgage, loans, car finance, your repayment record and much more. It can make all the difference between getting the card, loan or mortgage you want and a string of puzzling rejections.
If you're over 18 and have ever taken out a credit card, store card, catalogue account, utility bill account, mortgage or loan (apart from a student loan), then you have a credit report, which is held securely by a credit reference agency.
A credit reference agency is allowed to compile information about your credit applications and payments and send it on to any prospective lenders (or individuals who ask for their own report). Experian (Credit Expert) is the UK's largest, but there are others such as Equifax and Callcredit.
The credit card, store card, loan or mortgage that you are applying for will only be available to you if your credit score meets or exceeds the minimum level set by the lender.
If your rating is lower than this, you will either be offered borrowing at a higher interest rate, or declined it altogether. The more declines you get, the worse your credit score becomes, increasing the risk of tarnishing you with an adverse, poor or bad credit label.
If you are refused or declined credit, you are entitled to know the reason, as well as the name of the agency that provided your credit reference.
Before you apply for any type of credit, check your credit report. You can view this on a free trial basis or by paying a small fee. Make sure that all the information on the report is accurate, and get it removed by contacting the lender if it isn't. If you request your report on a free trial, and you don't need access to it after the trial period ends, remember to cancel it by setting a calendar reminder.
When you take out a joint mortgage or joint bank account, you become "financially linked" to the person you've taken it out with. If they have a bad credit rating, it could impact yours. If you have split up with your partner, husband or wife and/or the joint financial product you have taken is no longer between you both, inform the credit reference agencies of your disassociation. If not, the other person's financial dealings could still have an impact on your credit score.
Getting on the electoral roll will improve your chances of being accepted for credit. This is because prospective lenders and credit reference agencies use this to check you are who you say you are, and you live where you say you live. Ensure your credit record shows correct address details. Living at the same address, being employed in same job (with the same employer) and having the same bank account for a reasonable period of time will also help.
Lenders may consider the amount of credit you have access to, as well as the amount of debt you owe. Close all credit accounts such as credit cards, store cards, mobile contracts and accounts that you don't use or need anymore. Cutting up cards is not enough – you need to physically contact the provider and close the account! They will ask you why because they don't want you to leave, so just stick to your guns and close it down.
Missed and late payments can stay on your credit file for up to six years. If you've made a late payment due to circumstances beyond your control (i.e. your direct debit wasn't set up in time), so long as you made the payment promptly when you noticed, talk to your credit provider and see if you can get this black mark removed. This also applies to late payments for utility bills like gas or electricity.
Pay off more than just the minimum payment. This signifies good behaviour to a prospective lender. To be seen as managing your debt well, ensure that you're making headway into repaying what you've borrowed.
If you've never had credit before, it's difficult for a lender to assess you. Consider taking out a credit building credit card, making a couple of purchases on it each month and then repaying the balance in full at the end with a direct debit to build a good credit history. This will show that you can responsibly manage credit.
Credit builder prepaid cards can help you improve your credit rating. They charge a monthly fee (about £5), which you'll need to keep paying for 12 months, but at the end they will add an entry to your credit file that you have successfully repaid a debt. A prepaid card doesn't require a credit reference as you don't borrow on it.
Credit reference agencies don't get told if you are rejected for credit, but a note is made every time a credit search is made by a lender. Don't use a scatter gun approach to applying for credit. The more credit searches carried out in a short space of time, the less likely you are to be accepted for credit. Space out credit applications and, if possible, try to find out whether you're likely to be accepted before applying. Do not apply for products unless you really need them.
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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.
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