Improving your credit rating

With credit card and loan offers pouring through your letter box, it has never been easier to run up debt. But if a monetary mishap gets you blacklisted for credit, is there a reliable way to clean up your act? The short answer is yes, but it will take time if you want to repair your credit rating the right way.

The first thing a lender does when first considering you for a credit card, a loan or a mortgage, is to check your credit report. A file on your credit details will be held by Britian's three credit reference agencies. When a lender decides whether to give you credit, it will look for certain information on your file to determine whether you are likely to run off with the money or struggle to repay it.

If you find your applications are being turned down, avoid going from lender to lender hoping to be accepted. Every time a lender checks with a credit reference agency it shows up on your file. To a lender these 'footprints' can indicate that you are over-extending yourself financially, being refused by other lenders and forced to look elsewhere, or that there could be a potential fraud involved.

Past imperfect

There could be a good reason for your credit problems. If you have late or missed payments, loan defaults or County Court Judgements (CCJs) the details will be recorded on your credit file for six years (unless you pay off a CCJ within the first month). These may prompt a lender to decline your application for credit. If your debts are in the past but you are still struggling to borrow, there are ways to repair your dented record. The first trick is to resist the urge to attempt to make everything peachy overnight and throw good money after bad. Credit repair companies can charge anything from £50 to £200 but there is nothing they do that you cannot do yourself.

Start by getting a copy of your credit rating files from the three credit reference agencies. This may reveal a different cause which needs addressing. If your personal record is being influenced by the debts of a relative or former spouse, it is possible to have a Notice of Disassociation added to your file. This effectively filters the other person's information from your credit file. You can also add a Notice of Correction. This can be used where there is a piece of information that is correct but could benefit from being set into context. For example, a credit default from a time when you had been made redundant or following divorce.

If none of this applies to you or you have taken steps to resolve debt problems but are refused credit, ask why. It might that the credit scoring procedures used by a particular lender are very strict. The good news is that taking out some form of credit and then successfully meeting the repayments can help rehabilitate your credit status.

According to the British Bankers' Association, if a bank does not wish to accept your credit application, they will tell you the main reason why they were unable to agree your application on request. If you did not pass their credit score they will let you know and may provide further information on request. This is true of most credit providers.

Many banks also use 'Behavioural Scoring' - also known as customer or predictive scoring - in addition to credit scoring to rate their existing customers. Behavioural scoring is an automated assessment of the way that a customer runs their financial affairs, based on the pattern of activity seen passing though existing customer accounts. Statistically, this has been shown to be more consistent in identifying acceptable credit risks to banks and could mean that you receive more favourable treatment from your bank if you have been with them for some time and have had little or no problem with your accounts.

Healing hints

Credit reference agency Equifax confirms that scores automatically improve as one's overall credit picture gets better. That means showing a pattern over time of paying your bills on time and using credit conservatively. In addition, you should focus on the red and amber warnings in your credit analysis provided with your file. These represent the main areas where you are not receiving maximum points.

Here are some suggested tips to follow:

•  Pay your bills on time. Late payments can have a seriously negative impact on your rating.

•  If you have missed payments, get up-to-date and stay up-to-date. The more you pay your bills on time, the better your rating.

•  If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor. This will not improve your Credit Rating immediately, but if you can begin to manage your credit and pay on time, your rating will get better over time.

•  Pay off debt rather than move it around.

•  Re-establish your credit history if you have had problems. Opening new accounts and paying them off on time will raise your score in the long term.

•  Note that it is fine to request and check your own Credit Report. This will not affect your rating, as long as you order your Credit Report directly from a credit reference agency or through an organisation authorised to provide Credit Reports to consumers.

•  Apply for and open new credit accounts only as needed.

•  Have credit cards but manage them responsibly. In general, having credit cards and installment loans (and making timely payments) will raise your rating.