Your credit rating is one of the most important things you have in adult life; if you ever want to borrow money, having a good credit rating will be essential. Without a strong credit rating you will struggle to buy cars on finance, and getting a mortgage will be almost impossible, which means that you will be unable to buy a house.
But in spite of the importance of having good credit, many people give it little thought until they realise that they are unable to get credit that they need. If you are in this situation, you are not alone. Unfortunately, fixing your credit rating takes time, and not being able to borrow money when you need to can be very frustrating.
The following guide is designed to take you through the process of repairing your credit. Depending on your financial status you may be able to skip some steps, but you should read them all never-the-less. It won’t be a quick fix, but repairing your credit is fairly simple when you have a plan.
Step 1: Paying Off Your Debts
Most people with poor credit will already have some debts. If you have outstanding debts then your first step should be to pay them off. Not all debt is bad debt of course, some debt is essential, but other debts may be harming your credit.
Structured debts, such as personal loans, are OK. Ensure that you keep making your payments on time, but worry too much about such debts.
If you having any long standing credit card debt, you should endeavour to pay this debt first. Credit cards are designed to be continuously used and repaid, and having long term balances which are not being paid off will look bad on your credit file. By the same token, any long standing overdrafts should be the next priority.
Taking a consolidation loan in order to convert your unstructured debt (credit cards and overdrafts) into structured debt can be helpful, although if your credit rating is poor, getting such a loan might not be possible, or if you can get accepted, the interest rate might be prohibitive. Use judgement as to whether this option is a good idea for you, unnecessary credit checks may hurt your credit further, so caution is always advisable.
Step 2: Check Your Credit File
Knowing where you are starting from is essential in order to know where you are going. You can pull up your credit file from all of the top credit reference agencies fairly easily online.
Start by signing up for Credit Expert (Experian’s online credit reporting tool). This costs £15 a month, but the first 30 days is free, after which you can cancel if you want to. This tool will give you a detailed breakdown of what is on your credit file, which items are hurting you, and also what your current score is.
Your credit score with different agencies will be different, they all use their own scoring systems, but Credit Expert will tell you in simple terms, whether your credit is moderate, good, poor or very poor.
You should check your file thoroughly for any inaccuracies. If you find a mistake which is hurting your credit rating, make sure to let Experian know. You have the right to request the removal of any inaccurate information.
Finally, apply to the other two major credit reference agencies (Equifax and Call Credit) and request your statutory report. Each report will cost £2. Check through both reports, again, looking for any mistakes that you can have removed.
Step 3: Closing Debt Accounts
As you start paying off your long standing balances you can start closing accounts. Having too many credit cards or overdrafts can hurt your ability to get new credit, so if you have a lot of different credit accounts, consider prioritising any that you can pay off quickly.
Don’t get carried away though, it is worth keeping one credit card and one overdraft open. Once you have paid back a good portion of your debt, you should start using credit again, and having an open credit card will be very helpful. Additionally, having an overdraft available will make your budgeting easier.
Step 4: Using Debt Again
Eventually, it will be time to start using debt again. The ideal time to do this is once you have paid off all of your unstructured debts, but use some judgement as to whether you are ready. It is important that you are careful not to return to old habits.
If you already have a credit card or an overdraft available, simply start using them again, but ensure that you pay them back in full at least once a month.
If you don’t have any unstructured sources of debt available already, then you will need to apply for some. The process of applying for new debt is covered below.
Step 5: Applying For New Debt
If you already have a credit card or overdraft then for the time-being there is no need to apply for more credit unless you absolutely need it. But if not, you should aim to get a credit card as soon as possible, as this will be the most effective way to start improving your credit.
After a few months of repaying old debts, you should start thinking about getting new credit. How long depends on how much debt you started with, and how bad your credit was. Consider paying for another month on Credit Expert, so that you can assess your progress so far and make a realistic decision about which forms of credit to apply for.
If your credit score is still very bad then you might consider applying for a specialist “credit-repair” credit card. These tend to have higher rates of interest, but are easier to be accepted for.
Even easier to get hold of, are store cards or fuel cards. These still count as forms of credit and might be a viable option if your credit score is still poor. However, tread very carefully; these forms of credit can have high fees for late payments and high interest rates. Only consider this option if you are confident that you can keep on top of your spending.
Step 6: In The Long Run
Once you are using credit again, your credit rating will naturally improve. Over the coming months you should periodically check your credit score to make sure that it is going in the right direction.
If in step 5 you took out a store card or fuel card; once you have been using it for a few months, consider applying for a regular credit card (and if you are accepted, close your store card account).
Your aim should be to reduce your debts, every time you pay off an account you will be adding new positive information to your credit file.
Final Words
Throughout the whole of this process the most important thing that you can do is to keep a budget. Check your bank statements online every few days and make sure that you know when money is coming out and going in.
When money is tight, it is all too easy to forget about a payment and go into an unauthorised overdraft, or have a payment fail. Little slip-ups such as these will cause further damage to your credit score and will set you back, so learning to be in control of your cash-flow is essential.