How to improve your bad credit rating

If you are hoping to take out some products on credit, from a store card or credit card to a mortgage or loan, it is essential that you know your credit score. This score will be used to assess your suitability for credit, and will be the key factor in determining whether you can access those products. If you have a bad credit rating, you might find your options limited. But what exactly is a bad credit score – and how can you improve it?

What is a bad credit rating?

Lenders use your credit score to decide how much of a risk you pose when lending to you. Created from your financial history, there are three main agencies which lenders use to assess credit reports: Experian, Equifax and TransUnion. Each has slightly different criteria, so your score might differ slightly between each.

A ‘bad’ credit score is one that falls below a certain threshold. Individuals with a ‘poor’ or ‘bad’ score will find it much harder to access credit and will have to pay higher interest on any forms of credit they are able to take out.

What causes a bad credit rating?

Debt is the main cause of bad credit ratings. If you have active debts in your name, even if they are several years old, then your credit score will reflect this. Missed payments on credit cards or loans can also reduce your score.

Taking out certain types of loans that may indicate that an individual is struggling to cover the costs on monthly bills such as payday loans and other short term loans can also damage your credit history. Payday loans come with quite a bad reputation, especially in the eyes of potential lenders and credit reference agencies due to their high interest rates. Payday loans are seen as a type of loan that many people turn to as a last resort as the threshold to be approved for such a loan is so low.

Other factors that can affect your score are less obvious. Living with a partner who has debt, where your financial accounts are linked, can impact your own score. Lacking in credit history also reduces the overall rating. If you have never had any form of credit, then it is much harder for lenders to assess you.

How can I improve my bad credit score?

Improving bad credit is not something that can be done overnight, it requires a bit of patience but most importantly good organisation when it comes to managing your finances.

One of the first things to do if you want to improve your credit rating is to make sure you are on the electoral register. You should also request your credit report from one of the agencies listed above, and go through it to check your details are correct. Make sure all addresses linked to your name are accurate. You can request corrections to be made on your report in the event that something is linked to your account in error.

If your poor credit rating is due to a lack of credit history, you can improve your score by taking some low-risk forms of credit out. A mobile phone contract or a low-limit credit card can help here. Make sure you pay your bill in full each month, as this will build up your score and show lenders that you can manage credit responsibly.

If your poor rating is due to debt that is six years old or more, you can place a note on your file to indicate this. Debts should fall off your report after this time. If you have new debt, it is important that you take steps to pay it down as soon as possible. Contact your creditors to arrange a payment plan, clearing the highest balances first.

Can I still borrow if I have bad credit?

It is still possible to get a loan with a bad credit rating, depending on which direct lender you apply with; though you are likely to pay much more in interest and fees. Not all lenders will consider you with bad credit; however, some specialise in lending to people with low credit scores. The best way to improve your score is to keep borrowing to a minimum, and instead focus on your repayments. This will raise your score and open up more favourable rates and products for you.

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