Improve your credit rating - how and why

Your credit rating can have a seriously damaging effect on your personal finances, severely limiting your options when it comes to borrowing. County Court Judgments (CCJs), defaulted payments, missed payments to credit cards of utility suppliers and, of course, bankruptcy, can leave a black mark on your credit history.

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And with lenders tightening their criteria as a result of the economic downturn, a poor credit score will mean you have difficulty obtaining loans, credit cards and mortgages. If you have been turned down for a credit card or loan recently, it is probably because of your credit history, but the good news is there are ways to improve your score. Here's how.

How to check your rating
The majority of lenders will perform a credit check with one of two credit reference agencies when you apply for a loan or credit card - Equifax and Experian. A third, Callcredit, is also used by some lenders.

These agencies keep a record of your credit history, including the good, the bad and the ugly of your borrowing habits. However, it is possible to check these for yourself. Experian, for example, offer a free 30-day trial whereby you can view your credit history for yourself and see just why lenders are loathe to give you credit. You might just be surprised by the amount of information they have about your borrowing, but this is because every time you obtain credit, for whatever reason, it effectively leaves a footprint on your record.

When you receive your credit file, it will reveal your credit score. With Equifax, a score below 299 is very poor, while over 400 is good. Experian scores range from zero to 1,000, and a score of more than 961 is excellent.

How can I improve my score?
With your credit history in hand, it will no doubt quickly become clear why you are having trouble obtaining finance. But if you are hoping to get a mortgage or a personal loan any time soon, there are ways and means to improve that score.

Straight off the bat, you should double check that there are no mistakes on your record. Look for records of other people's debts or payments, or past debts that have long been settled, and if you find any errors, write and tell the agency.

Secondly, if your credit score is poor, stop applying for credit. A horde of knocked back applications will quickly put a black mark on your file and smack of desperation in lenders' eyes. If you do try to get credit, be sure to ask for a quotation search and not a credit search, as refusals will leave their mark.

It is absolutely paramount too that you do all you can to keep up with repayments for existing credit agreements. If you are struggling, speak to the creditor and see if there is any way you can spread the cost and make smaller repayments. Each time you miss a payment, and this includes going over your overdraft limit, it will make its mark on your credit history.

The above measures should put a stop to your plummeting credit score, but what can you do to improve it?

Oddly, borrowing is the quickest way to boost your rating. Lenders generally don't feel comfortable dishing out money to those who have no history of sticking to credit agreements and keeping up with repayments.

For those who are able to obtain credit, applying for credit or store cards, spending a small amount and then repaying in full at the end of the month will put your rating on the up and up.

Unfortunately, those with a low score will struggle to manage this without paying eye-popping interest rates, but there are still things that will make you more attractive to lenders.

Having a land phone line, a long-term employment history and a long history with the same bank will all work in your favour, as will renting or owning the same property for some years.

And finally, do get yourself on the electoral roll. It might seem unnecessary to you, but it's free, and as long as your address and details are absolutely correct (and do check this), lenders will look more favourably on your score.

Improving your credit score won't happen overnight, but stopping the rot is essential if you are to get that mortgage or loan in the future, so stick at it.