You’ve made a wise move by checking your credit score. Only now, you’re at a loss as to how to go about repairing your bad credit rating.
If you’ve built up a history of bad credit, the first thing me must stress is that credit score repair takes time, patience and commitment. But with those three things, your bad credit rating can and will improve over time.
Causes of a Bad Credit Rating
Causes of bad credit rating are a hotly debated issue in the world of money management. While no one knows for certain – in terms of set credit score points – just how badly the following factors impact your overall credit score, it is possible to rank them in order of seriousness. Let’s count them down…
The Top Ten Causes of Bad Credit rating
- Having No Credit History
If you’ve never used any form of credit – such as an overdraft, credit card or loan, credit agencies have no history to judge you on. In this respect, you’re regarded as an unknown risk.
If this applies to your situation, you should start using products that are relatively easy to credit score for (such as a small overdraft). Whatever the financial product you choose, just ensure that you use it responsibly and keep to your payment terms.
- Using the Wrong Forms of Credit
Certain types of financial products can negatively impact your credit score. Payday loans, logbook loans and particular credit cards designed for bad credit can all act as a red flag that you’ve used credit irresponsibly.
With credit cards, it’s also important to choose a card that provides an interest rate and fee structure that doesn’t worsen your financial situation, and that you stay within your set credit limit.
- Only Making the Minimum Repayments Each Month
When you only make the minimum repayment on your credit card each month you face the prospect of a debt that takes years to repay. In contrast, repaying more than the minimum amount won’t only save you interest, it could also improve your credit rating.
- Late payments/Underpaid payments
Number seven in our list of causes of bad credit rating is late or underpaid repayments – whether in relation to a credit card, loan or any other credit product.
Making your repayments late, even by only a day, or making repayments that are lower than the amount requested, are all recorded on your credit history and impact your credit ratings.
Gradually, this could lead to a ‘bad’ or ‘very bad credit rating, significantly impacting your ability to be approved for credit in the future.
- Defaulted Payments
Defaulted payments are where you’ve missed three or more repayments (most credit providers will send a formal default notice by post following three to six missed payments).
Within this letter will be a request for a fixed amount of money within a set period. If you can’t make the repayment, your credit product will be cancelled.
Defaulted payments – whether you meet the final demand or not – will significantly harm your credit score. Our top tip in this instance is to communicate with your credit provider and seek out a suitable debt solution as soon as you’re able to.
We’re now mid-way into the causes of bad credit rating– from here on in these factors can leave a long-lasting dent in your credit score.
- Collection Accounts
When your debt is passed from the original credit provider to a debt collection agency it is marked on your credit report.
County Court Judgements (CCJs) only happen after a long process of a company attempting to collect money from you. If you’re ever issued with a CCJ you’ll need to repay it within one month, or it will remain on your credit report for six years, another cause for a bad credit rating.
- Identity theft
Identity theft can devastate your credit rating without you even realising. To protect yourself from identity theft you should find out whether your bank offers a text or email alert system, as well as signing up to a free credit reporting platform to check recent applications each month.
- Insolvency products
The penultimate cause of bad credit rating, insolvency solutions, such as IVAs, Debt Management Plans and Minimal Assets Process (MAP) are serious debt solutions that are marked on your credit file for six years.
That said, these solutions all have a lot to offer those who are struggling under the weight of their debts and can provide a glimmering light at the end of the tunnel. What’s more, following the completion of your insolvency solution you’ll be free to gradually rebuild your bad credit rating once more.
Bankruptcy is seen as a last resort for debtors, and unsurprisingly it can and does result in credit scores that plummet. To provide some idea, a previously good credit score of 700 could tank to 200.
You also need to bear in mind that a bankruptcy will remain on your credit file for seven years (if it’s a Chapter 13 Bankruptcy) or 10 years (if it’s a Chapter 7 Bankruptcy).
Ten essential steps to tackle your bad credit ratings
Step One: Disassociate yourself from those you’re Financially Linked To
First things first, being officially associated with a financial partner on your credit report takes away the control you have over your credit score.
If you’ve ever applied for a joint bank account or mortgage you’ll be ‘financially linked’ to the other person. However, if you’ve now split up and the credit product you both had is either closed or only held by a single person you can apply to a credit agency for a disassociation.
Step two: Register on the Electoral Roll
While not being on the electoral roll won’t result in a bad credit rating, registering will improve your chance of being accepted for credit products. This is because any potential lender will run a check to say that you are who you say you are and that the address you’ve provided is correct.
You can register for the electoral roll here on the Gov.Uk website.
Other factors that can improve your bad credit score include living at the same address; holding the same bank account; being a homeowner; having a landline and being employed by the same company for several years. These factors are known as ‘stability factors’, which become all the more important when attempting to repair bad credit history.
Step Three: Close Any Unused Credit Products
Unused credit products – such as credit cards, store cards and overdrafts, won’t directly lead to a bad credit rating, however keeping these open will impact how much of a credit facility you can be approved for with new lenders.
Step Four: Never Skip or Make Late Repayments
Missing a single payment can be marked on your credit report for as long as six years. If you’ve missed or made late payments in the past you won’t be able to remove the markers that have been left, but you can endeavour to stick to your financial agreements moving forward. Many credit providers offer payment reminders via text or email (which can help if you’re forgetful!).
If you know that you’re not going to be able to meet your upcoming payments you should always speak with your lender in the first instance, and research debt solutions if you feel this will be an on-going issue. You may also want to read our guide on dealing with debt problems – step by step.
Step Five: Repay Your Debts
Ideally, you should be tackling your debts by repaying off significant lump sums, however failing this; you can also help to repair your bad credit by repaying more than the minimum requested amount. This approach signals to potential lenders that you’re practising good financial habits.
Step Six: Build Your Credit History with A Credit Card
If your bad credit rating is due to your non-existent credit history, you’ll need to use a credit product in order to credit one. Until then lenders will regard you as a risk that is difficult to assess.
If you follow this step, make sure you repay any balance at the end of each and every month (that way you’ll avoid paying any interest).
Step Seven: Don’t Make A Flurry of Credit Applications
Undertaking multiple credit applications can create a temporary bad credit rating. While the credit reference agencies aren’t informed as to whether the reported applications have been successful, several applications in a short space of time can indicate financial problems. In short, if you want to avoid a bad credit rating, you should leave at least several months between applications.
If you do apply for credit, try to use a pre-approval tool to discover your chances of acceptance prior to officially applying.
Step Eight: Sign Up for A Free Credit Report (and Check it Each Month)
Using a credit reporting platform can help you understand how factors such as late repayments are leading to your bad credit rating. Most also come with a suggestions feature, which will advise you on steps you can take to repair your bad credit, based on your bad credit history.
A final bonus to regularly checking your credit report is that you can pick up on signs of identity theft – where someone else has applied for and used credit in your name.
Step Nine: Double Check That Your Credit Report Information is Correct
Take the time to pick through your bad credit rating in detail. Check that all the listed accounts and dates are correct, and make sure that any closed accounts that are older than six years (since their closure) have been removed. You should also challenge any unfair defaults, approaching your lender in the first instance. If that fails, you should contact the credit reference agency and ask them to add a short, factual Notice of Correction. For example: ‘this default is for a jumper, ordered from a catalogue that never arrived’. Finally, you should complain to the Financial Ombudsman if the lender refuses to help but you feel the default is incorrect.
If you find any information that isn’t correct, get in touch with your credit agency.
Step Ten: Avoid Using Credit Products for Bad Credit
Certain credit products are designed for people with bad credit and can serve as an indicator to lenders that you’re in poor financial standing. Bad credit products include:
- Logbook loans
- Payday loans
- Certain credit cards
- Credit card cash withdrawals
Unless absolutely necessary these products should be avoided.
Repairing a bad credit rating is a long, drawn-out process. It demands time and energy, as well as committing to good money management in the future, but it absolutely can be done.
If you want to explore what other debt solutions may be suitable for you and avoid the most serious cause of bad credit rating there is head to our debt solution page. Or Call Us Free 0800 002 9051 or Fill Our Contact us Form and we will help you with the best solutions for your Bad Credit rating.