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How to improve your credit score

Tuesday, 28th April 2009

103-info-questionsNobody is entitled to credit, but there is a lot you can do to help improve your chances - but remember there’s no overnight fix. Clearly lenders want to minimise their risk.

Before attempting to rebuild your credit you should be confident of your financial situation. Borrowing further, other than in some cases to consolidate or move credit, when you are in a difficult situation is rarely a good idea.

There are budget forms for free on the site which will help you determine the amount of disposable income to service your debts. We strongly recommend you use one of these first.

There are 3 steps to getting back on the ladder:

  • Repair your Credit File
  • Maintain & Reduce existing credit
  • Applying for the right types of New Credit

The majority of people get in to a ‘bad credit’ situation because they ignore their creditors requests for payment. Most large lenders have entire departments dedicated to dealing with borrowers that are unable to meet their repayments. They don’t want you to default on your credit agreement any more than you do.

The 3 most common ‘bad credit’ indicators are:

  • Late payments: This is not normally too serious unless its over a prolonged period or if its happened within the last few months over more than one or two accounts.
  • Defaults: More than one default is likely to seriously impact your ability to get unsecured credit. Remember that a default will remain on your credit file for 6 years. Defaults are either marked as satisfied (paid up) or not. Once a lender has defaulted a credit account they are likely to pass it to a debt collection agency to recover the debt.
  • CCJs: The most serious of the three.  A CCJ, even for a small amount, indicates to lenders that you have deliberately ignored your creditors. Few lenders follow accounts through to this stage for smaller amounts unless you have wilfully failed to maintain agreed payment / reduced payment arrangements.

Other useful tips

  • If the lender has registered late payments against you, offering a payment plan to bring the account back into order may be considered sympathetically if you seem genuine about also servicing the account properly in future.
  • If the lender has defaulted the credit agreement you could aim to get it reinstated (therefore removing the default). They are unlikely to remove the late payment indicators on your account however. Once they have reinstated the account you could try to get them to remove late payments, but trying to do both at the same time may be pushing your luck and mean that you fail on both counts.
  • If the lender has registered a CCJ against you, you’ve probably got a harder battle in front of you. You will need to persuade them that having the case reheard will result in them receiving the money faster. If you can pay the whole amount then ask for them to apply for the case to be reheard, settling the amount quickly after the hearing will result in the CCJ being withdrawn. If you can’t settle immediately there are other options, but will require some skilful negotiation.

If you can’t rectify all of the ‘black marks’ on your file, then you can ask the credit reference agencies to put notes on your file – however lenders’ automated credit scoring systems don’t read these. The only time that they may be seen is when a declined application is appealed and an underwriter manually reviews your file.

Other indicators can also be placed on your credit file, this would include CIFAS and GAIN indicators, an Individual Voluntary Arrangement (IVA) or Bankruptcy order.

Once you understand how you’re going to ‘tidy up’ your past financial situations you should then look at your current situation. You need to understand how lenders look at your file. What counts for you, and what counts against you?

Do you:

  • Have associations (other family names) on your file that aren’t helping?
  • Have lots of small loans and balances on credit cards?
  • Have repeated applications for further credit?

Are you:

  • Maintaining regular payments?
  • On the electoral (voters register) role?
  • Making lots of applications for credit?

Once everything is in order – your past and current credit and you wish to apply for further credit there are several things to bear in mind. You should apply for credit that you think you will get. If you’ve had defaults and late payments then applying for a £10,000 unsecured loan (even to consolidate your debts) is unlikely to be successful. You need to think about what your eventual goal is to achieve, maybe this is:

  • Generally better credit as you’re in a stable financial situation now and will want to borrow in the future.
  • Moving your debts to a different lender to achieve a better interest rate.
  • Applying for a mortgage in the near future.

There’s a lot to take in, but with a little effort and some time you should find yourself in a considerably better position.

 

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