Credit Ratings in Spending

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Credit ratings and scores can seem very complicated and often rather confusing; if you understand the basics you should hopefully be able to manage yours as effectively as possible.

So what is a credit rating?

A credit rating is a simple number which many lenders use to determine whether or not they will give a loan or credit to someone. Credit ratings are used to determine applications for various things including loans from banks or building societies, a mortgage for buying a home, a credit card/store card or even hire purchase of goods.

Your credit rating is simply how financially attractive you are to a lender.

Why do I need a good credit rating?

You may not be aware that you have a credit rating until you try to access credit, say for the purchase of your first car.

Credit scoring can dictate what financial products you will be able to access and how good the ones you actually get are.

For example if you apply for a loan to buy a car, the loan may be advertised with a ‘Typical APR’, this interest rate may be very low, but if you have a poor credit rating you may not be offered such a good rate. You may still be accepted but offered a different product.

If rejected for credit it does not mean that another lender will do the same as scoring systems differ.

What affects credit rating?

An individual’s credit rating is impacted by a number of factors, some of which are controllable, others of which are not. A credit rating has to be built up. If you have never received credit then you will have no history and subsequently no rating or score.

Whether you have a less than perfect credit rating or no credit rating at all, there are certain things you can do to improve your rating and therefore eligibility to access credit.

What causes a weak credit rating?

  • Your name isn’t on the electoral roll.
  • You have legal actions against you (for owing someone/organisation money).
  • You are bankrupt.
  • You’ve missed payments on past credit, including student loans (pre1998).
  • You have made a high number of credit applications in a short period of time.
  • You have never taken out a credit agreement before.
  • Wrong information on your credit history.

How you can strengthen your credit rating/score: 

  • Check your credit report at least once a year, two of the main credit agencies are Experian and Equifax – make sure that all the information is accurate and up-to-date.
  • Ensure you are registered at the correct address for the electoral roll – this can be the biggest contributory factor to a credit rating/score.
  • Pay any past debts off and ensure any legal action taken against you has been dealt with.
  • Ensure that you pay agreed sums to existing accounts on time and in full.
  • Resist the urge to apply for credit in a number of places- hold fire until it has started to build again.
  • Borrow to build credit if you have no borrowing history; using the card/account wisely, without incurring charges or penalties.
  • Cancel credit cards that you aren’t using or don’t anticipate using.