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How to improve your credit score
Introduction: From
a mobile phone to a house, it is critical
that your credit score reads happy,
if you planning to take a loan for the
purchase. The current economic climate
has only forced lenders to raise the
bar and it has never been more important
than now to have a credit score that'll
impress the lenders. Here's a simple-to-follow
guide on ways you can improve your credit
score.
The current economic climate is a testing time for everyone, especially banks and financial institutions. The world at large and particularly UK, until recently, have been enjoying "easy money", with banks and financial bodies more than happy to provide you with a loan. Things have changed now and lenders are looking for an excuse to reject your loan application. Unless of course your credit score is real good.
Understanding the mechanics
From a lender perspective, credit score reflects your reliability, risk profile and financial discipline.
If you have been staying at the same address for a long period of time, if you have been with the same employer for a fairly lengthy period, if you have been banking with the same bank, again for a respectable stretch of time, if you have lesser number of inactive or closed credit accounts, then the credit scoring system would award you with a better score since the odds are stacked in your favour and you certainly give the impression of being reliable.
On the other hand the work that you do, your age, marital status, number of dependents you have, your home ownership status, the financial discipline of your neighbourhood and that of those who lived in your property earlier determine your risk profile.
However, the points discussed above, that determine your reliability and risk profile can't be autocorrected. It's important to understand that your credit score can't be improved overnight and there are some things that are beyond your control.
A credit score is based on information maintained by the credit agencies and in the UK there are three main agencies. Very often the three agencies can rate your scorecard differently from one another, depending on what information each agency holds and occasionally it is possible that these agencies have wrong data as well.
Dos & Don'ts to improve your
score
- No or low levels of credit activity
is not going to help you get a better
credit score. Lenders like to see
a few credit accounts based on which
they can judge you. So don't be
afraid to get yourself some credit
accounts.
- Paying your bills and other financial
commitments on time is extremely
important. Always pay before the
due date and pay the full amount
if possible and certainly the minimum
payment on credit cards.
- Setting up direct debits should
be very useful and will ensure you
don't forget paying on time. However
ensure all direct debits are always
honoured.
- If you have a few direct debits
that are automated through your
bank account, it would be a good
idea to have an agreement with the
banks to provide you with an overdraft
on the account which you do not
use under normal circumstances except
for when you forget a direct debit.
- It's best to have direct debits
going out in specific time range
in the month rather than have them
spread all over the month, this
way planning for the direct debits
should be easier.
- Don't apply for too many credit
applications at the same time, this
indicates you are desperate and
reduces the credit score.
- Not applying for any credit applications
is also not very good since this
indicates you are not financially
very active. Usually 2-3 credit
applications in a 6-month-period
are considered ideal. Spread your
needs. Applying for 2 credit cards,
1 car loan and a personal loan in
a short span will not help.
- Unlike what many people think,
checking your own credit score is
not considered as a credit application
and this will not reduce your credit
score.
- Never ignore any credit warning
letters even if they are for very
small amounts. Unpaid parking fines
are a classic example of this. If
there is any bill that you think
you need not pay, challenge it,
have it agreed that you need not
pay it rather than just ignore it.
If the service provider takes legal
action and gets a county court judgement
(CCJ) then this will affect your
credit score very heavily.
- If a service provider bills you
for more than what is due from you,
never take this lightly. In view
of maintaining your credit score,
I would recommend that you pay the
excessive bill first and then challenge
the excessive bill and have a refund.
This way your credit score will
not be affected.
- Never challenge a mobile phone
company and say "Do what you can".
It's best to resolve your issue
with them, they can potentially
ruin your credit score and spoil
all chances of getting a loan, since
a contract mobile phone is a credit
account and if they register a 'default'
then this impacts your credit score
heavily.
- Check your credit score periodically
especially if you are planning to
take out a mortgage in the near
future. Keep tracking your score
and also ensure there is no wrong
data attached to your file. A common
example of wrong data attached to
your credit score would be if unknown
data of a person with a similar
sounding name has been attributed
to your score.
- If you are ever denied credit,
never take chances and try elsewhere,
the best thing to do is to check
your credit score and understand
this before attempting again.
- It always helps to be registered
in the electoral roll. This is much
more important than one thinks.
There are some lenders who will
not lend money to those not on the
voters' roll. The longer you are
registered on the voters' roll the
better it is.
- Being reachable on a landline
telephone as opposed to just a mobile
phone is preferred by lenders and
this can help you have a better
credit score than not having a landline
telephone.
- Never lend your name to anyone
for any reason. Often you will want
to help a friend and for instance
get him a contract mobile phone
on your name and guarantee that
he will make payments on time. But
if he does not this severely affects
your credit score.
- Similarly if you allow others
to use your residential address
for banking purposes and should
they not keep up the credit commitments,
this would also have a fair impact
on others in the address especially
if the person runs away without
paying his debt.
- Avoid using your credit cards
up to the limit. If you have a credit
limit of �2,500 the lenders like
to see you leave at least about
25% of it unused to show them that
you are in control of your finances.
- Lenders like to see long history
in credit applications. If you have
been having a bank account or a
credit card for a very long period
of time, think twice before cancelling
it, a long standing account is good
from a credit score point of view.
- Do not have more accounts than
you need or can manage. Some of
us have the tendency to have several
bank accounts. This is both difficult
to maintain and does not add any
value to your credit score, it's
ideal to have one bank account and
transact all of it through that.
- Avoid the temptation of having
too many credit cards. Think twice
before applying for one. Consider
cancelling credit cards especially
if it's unused and you don't see
that card being needed in the near
future.
- When you change your address,
notify this as early as you can
and ensure you notify all credit
accounts. From a credit score point
of view it is not good to have credit
accounts registered to multiple
addresses at the same time.
- It's best to avoid making credit
applications just after you have
moved address. It's best to make
any application 4 - 6 months after
you have moved into your new house.
Even if this is for something as
small as a contract mobile phone.
- It's best to pay off the loans
from savings if you have any. This
is for two reasons. The interest
you will get on savings is going
to be much lesser than what you
pay on your credit account and also
since the credit report does not
carry information on your savings
account, the lenders can't see how
much savings you have. If you can
use this to reduce the loan shown,
it will work to your advantage.
- If you are going through any kind
of financial trouble, don't suffer
in silence, speak to the lenders.
Explain your situation and see if
you can agree to something mutual
and they don't report this on your
credit score. If you have been paying
back well many lenders should be
willing to agree to something mutually
acceptable.
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