When we were dancing the night away at university and planning our world trips, we weren’t thinking about the cost. We just wanted to have a good time. But these actions in your teen years bring on problems for your future - ‘mañana’.
We would simply fill out a loan application and hey, if we didn’t get accepted, we would just try again. There’s no harm in that, right? Wrong! Just as our love of student takeaways has finally caught up with our waistlines, so too has our reckless spending. And what makes it worse, there is a record of every financial decision you have ever made, both good and bad, in black and white. May I present to you … your credit score!
But who is affected?
A bad credit rating affects people of all ages, whether you are looking to obtain a mortgage or secured loan, car finance or simply a mobile phone contract. It can even affect anyone who is trying to fix their debt problems by trying to get a debt consolidation loan.
What causes the damage?
Defaulting on direct debits, loan or credit card repayments, CCJs and bankruptcy are some of the factors that will affect a credit score. Being turned down for a loan will also leave a harmful ‘footprint’ on your file, especially if these failed applications start to mount up.
Does it really matter?
A poor credit score can drastically limit your chances of obtaining any type of credit in the future. The credit that is available to those with poor credit scores is from a ‘sub-prime’ market. This, apart from being limited in the current economic climate, comes with high interest rates to balance the high risk that you would present to the lender.
How do I check my credit score?
You can find a copy of your credit rating from different credit reference agencies, e.g. Equifax or Experian. These agencies use information found on the electoral role, from CCJs and from previous agreements to create a picture of your financial history. This information gives you an indication of how well you have previously managed your debt. Your potential lender will contact these agencies to assess your suitability for the loan, and to determine what rate to award. The banks or lenders make their decision based on the information provided by the credit reference agency, but ultimately grant the loan based on their individual criteria.
How can I rescue my low credit score?
As a student or young adult we don’t have any history. We first need to build one. But don't worry, there are some basic steps that can be used to help restore and build up your credit status.
1. Spread out your applications
Frequent requests for credit over a short space of time, especially if are turned down, indicates that you are desperate for the money. This gives banks and lenders the impression that you cannot handle your finances very well.
2. Look at your history
Make sure that any old agreements that you no longer use are closed down. If you have applied for a shared credit in the past and are no longer together, make sure you have written to the lender informing them of the change, as their bad credit history could affect your credit score.
3. Check for mistakes
Mistakes happen, just make sure that it’s not at your expense! Review your full credit history to ensure that you don't have anybody else’s debt on your file in error.
4. Check your address
Lenders favour applicants who have lived at the same address for a considerable amount of time, preferably at a property that you own rather than you rent. Make sure that you are on the electoral register at your current address, and that all your debts are registered to the correct place.
5. Keep up to date with repayments
By repaying your debts on time, you prove that you can manage your money and so present a lower risk to a potential lender. If you are struggling with any of your repayments, don’t ignore the problem! Contact your lender straight away to discuss your situation and organise a revised payment plan.
6. Demonstrate that you are a responsible borrower
This can be done by taking out credit and paying it back in full and on time. For example, you could take out a credit card, spend a little on it each month and pay it back in full the following month so that no interest is incurred. Do this for 6 months and you will do wonders for your credit score.
7. Be realistic
Use a footprint free tool to search for rates that are individually tailored to your circumstances before making a formal application and remember – never attempt borrow more than you can afford to repay!
8. Shout about your long term achievements
Lenders love to hear that you have a lengthy employment history with the same company, or that you have a long-term relationship with your bank. They even like to hear that you have a landline installed rather than just a mobile, so make sure you use these positives when applying, and make sure they are written correctly on your credit reference!
9. Ask for help
Consider asking somebody with a good history to co-sign a loan with you. As long as the agreement is repaid on time, this can really help to boost your score.
10. No credit history is bad history!
Lenders prefer to see a credit score with proven management of credit, which means that those without any credit agreements would be less favourable than those who have history managing debt. A good way to fix this would be to take out a credit card, spending just a little each month and repaying the balance IN FULL the following month.
Rebuilding your credit score can take time, but stay committed - it can be rescued!
Always get professional advice before making any financial decisions!