Credit ratings are a vital part of investing. Without a good credit rating you will find it hard to access many forms of finance (not all) and it will dictate how favourable the terms are for the finance required. In the following extract from my book, I cover the basics of credit ratings, the importance of having a good one and how you can improve your credit rating.
I liken a credit rating to a school report or even a reference written by your school. In the example of a reference for a student moving schools, it will provide an overview of you as a student. For instance, you may be leaving school and going to college. The school will write a reference including information regarding your attendance, grades, attitude towards school and extracurricular activities. The college or school will then decide as to whether their school/college is right for you.
A credit rating is little different to this report but is a financial record. It shows a record of the money you have borrowed and how reliable you are when it comes to paying it back. It considers many different factors such as where you have lived and how long for, your earnings and debt levels. Businesses and organisations will then look at your credit rating to decide whether you are a suitable applicant for their loan.
Most lenders will be looking for reliable, low-risk applicants, so they will want someone with a consistent form of income, with a secure job and consistent address history. These things all reflect stability to the lender, providing them with the assurance that they will get their money back.
How can I improve my credit rating?
It would be useful if you could find out what this reference/report has said about you before you need to change schools. In the financial world, this is a service that credit rating agencies can provide you with; you can check your rating before an application to borrow money (change schools).
If you do these checks and find your rating is low, there is time to do something about it. The most important thing is to keep up with debts that you owe, making sure you pay on time. If you have not been able to do this, then you need to start as quickly as possible and you will find that you can start to improve your credit rating.
Just as at school, different offences will have different consequences. For example, missing a homework once is hardly a severe offence. However, missing lessons might be a greater offence. It works no differently with debts; they can have different levels of severity. For example, if you miss payments with some companies over a prolonged period, you might be given something called a CCJ (County Court Judgment). A CCJ can stay on your record for a long time, just as being expelled from school can if you repeatedly misbehave at school. However, one late payment or borrowing on a credit card may be cleared in a much shorter space of time. Credit ratings generally go up and down and certain situations tend to show quicker than others.
You can also do the following:
Make sure you are on the Electoral role. That means that when you are 18 years old, you need to have registered to vote. There will be a voting card sent to you in the post to complete. Once completed and returned, this will be a way for lenders to be certain that you are living in the address provided on their records. It is just further confirmation that you are who you say you are.
As we have previously mentioned, you can also check your credit file (again at one of the websites listed below) to see if there are any incorrect records of missed payments or debts. This happens more than you would expect and can be for reasons such as people putting bills in your name, people taking loans out in your name (without you knowing) and names and addresses being inaccurate. It is important that you check your credit rating so that you can address these issues. After all, you would not accept someone else’s school report and therefore take responsibility for their poor grades and attendance.
Another way to improve your rating is to close old store accounts and credit cards that you do not use anymore. These accounts show that you have further opportunities to borrow money and go into debt. This can scare potential lenders away. Lenders will think that you are high risk, having the potential to not only take out a new loan with them, but perhaps going into further debt elsewhere, making it difficult for you to meet your repayments.
How can I find out what my credit rating is?
These are all free apart from Equifax. Experian offer more detailed information if you join as a member (approximately £15 a month). I tend to find with a mixture of Money Saving Expert’s credit rating service and Experian, you can get a good indication of what your credit score is and why.
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