Does A Bad Credit Rating Really Matter?

If you have a poor credit rating, it will limit your borrowing options. Defaulted payments, County Court Judgments, and bankruptcy orders leave a black mark on your credit report, and you won't be approved for new credit.

The same problems arise when you miss payments on your utility bills, credit cards, and other financial commitments. A declined credit application is one of the first signs that something is going wrong with your credit. The declined application leaves a footprint on your file and can worsen your situation.

If you have poor credit, your only means of borrowing money may be through the sub-prime market where interest rates are high because of your perceived risk. While these options are available, they're severely limited.

Credit agencies and your credit rating

Lenders use one of two credit reference agencies to get information on your financial past and determine whether you're a suitable candidate for credit. Those agencies are Experian and Equifax.

You can request a copy of your report on a free trial basis - this report is free as long as you cancel the subscription before the end of the 30-day trial.

CallCredit is another agency, but it is not as popular as the other two.

Credit reference agencies do not make lending decisions. They compile your credit history from various sources, including your previous lenders, County Court Judgments and the electoral roll.

How to improve your credit score

Improving and maintaining your credit score involve a series of actions:

• Check for your correct name and address on all your debts
• Check your files for errors - make sure you're not held liable for other people's debts
• Register on the electoral roll
• Space out your credit applications - too many inquiries may be viewed as a desperate attempt to get credit
• Apply only for credit you're likely to qualify for - ask lenders to do a quotation search before they do a credit search
• Be responsible with your credit - pay all your bills on time and don't max out your limits
• Close the credit accounts you no longer use
• Joint accounts will hurt your credit if the other person is not responsible with his/her finances. Be careful of your financial links with others.

The information you supply on your application for credit also determines whether or not you're approved. Lenders view the following details as clear signs of stability:
 
- Fixed land phone lines

- Long history with your current employer

- Long-term address, ideally in a home you own

- Long-term relationship with your banker

Data protection

If you're refused credit, the lender must explain why. According to the Data Protection Act, you can ask for a review of your application if the lender uses scoring and declines your application for credit.

This provides the opportunity to review your credit rating to find areas for improvement. You might also discover any errors that might be on your report.

If you were turned down simply because your credit is poor, all is not lost. It will take some time to repair your credit, but after a year of exemplary habits, your credit score will improve.

Correcting errors on your report

Contact the credit reference agency to report incorrect information as soon as you make the discovery. The agency will require documents to back your claims, so be prepared to provide it when you make the call.  

Building a credit history

No credit can be just as frustrating as poor credit if you're repeatedly refused credit. Keep in mind that, without a credit history, the lender will have no way of knowing whether you will repay your loans.

Get a store card and credit card - even if they're high interest cards. Use the cards and pay them off on a regular basis. Opening a few different types of accounts to speed up the process of building credit, but make sure to pay off your balances in full otherwise you'll be stuck paying high interest rates.

As long as you pay your bills on time, you'll develop a satisfactory credit history in the matter of months. Keep up your good habits of charging only what you can afford to pay and making your payments on time, and you won't have to worry about credit repair and declined applications later down the road.

Sam Jones the author was recently asked by a reader how do I improve my credit rating? He suggested visiting the helpful advice pages at uSwitch.