How to improve your credit score

Borrowers with less than perfect credit scores can find their applications for the best credit card and loan deals rejected, but there are ways to improve your chances of being accepted.

The vast majority of the top credit card offers are limited to those with unblemished credit files, while mortgage lenders can refuse to take you on as a customer at all if you have too many black marks against your name.

Recent research from moneysupermarket.com revealed that the personal loans market has become split into two tiers; with borrowers with poor credit scores paying at least twice as much in interest than those with excellent rating, especially if they only want to borrow small amounts.

That’s why we have come up with a 10-step plan to improving your credit record – so you can gain access to all those market-leading deals.

1. Register to vote

Many companies use the electoral roll to combat identity fraud. So it is vital that you are registered on the electoral roll at your current address if you want banks and other lenders to view you as a safe bet.

Contact your local council and ask for a registration form, or sign up online, if you’re not.

2. Check your credit report for errors

A copy of your credit file can be ordered online for £2 from the websites of the three main credit reference agencies: Experian, Equifax and Call Credit.

Once you get your report, you can then check it for any errors. If, for example, you've had a County Court Judgement (CCJ) that is now settled, make sure the settlement is recorded on your credit file. If it isn't, contact the court to get confirmation details and inform the credit reference agencies.

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3. Offer an explanation for any blips

If your credit file shows a period of late payments, it is worth knowing that you can place a Notice of Correction against this explaining the background to any arrears.

If the period coincides with you being made redundant, for example, or getting divorced, then lenders considering whether or not to take you on may be swayed by a notice of this kind – especially if you are now back on track.

4. Pay by direct debit so that you never miss a deadline

Even if it's only a few days late, just one overdue payment can damage your credit score. And a series of late payments can really hurt your rating. Getting all your bills paid on time for 12 – or even six – months should start to have a positive impact, though, which is why it’s a good idea to set up direct debits or standing orders for your household bills and financial payments to ensure you never slip up.

5. Don't despair

If you have a very chequered financial history, you could well feel that there is no point in trying to improve your credit score.

However, it's never too late to clean up your act. Get yourself up to date with your payments as quickly as you can and then keep up with them, and your score will begin to improve within six months.

What’s more, as long as you stay on the straight and narrow, those black marks will eventually disappear completely.

6. Keep your balance well below your credit limit

Of all the factors you can control, how much you owe is probably the most powerful. Reducing the amount you owe on credit cards, overdrafts and loans will quickly help to push your credit score higher, while keeping any credit card debts to below 30% of your credit limit will also help. Making more than the minimum monthly payments on your credit cards, for example, will also stand you in better stead with the banks.

7. Avoid applying for deals you are unlikely to get

Rejected applications for credit cards, personal loans and mortgages are noted on your credit file and can therefore further damage your chances of being accepted in the future.

Before applying, it is therefore a good idea to do a bit of research into whether or not you are likely to be taken on.

A lot of it is common sense. If the deal is market leading, for example, then you are unlikely to qualify unless you have a reasonable credit score.

Those seeking a new credit card deal can also use the moneysupermarket.com Smartsearch tool to find the best cards for their circumstances.

8. Close accounts you no longer use

One of the main factors taking into account by financial companies when judging your suitability for credit is how much credit you already have available to you. It is therefore important to keep this to a minimum by closing down any accounts you no longer use.

9. Prove you can be responsible

While you certainly do not want access to too much credit, not having any credit cards or loans can actually work against you too as lenders are looking for signs that you are capable of meeting repayments. Good management of all contracts, including 12-month mobile phone agreements, for example, can have a positive effect on your credit score.

There are also a number of credit builder credit cards designed specifically for this purpose on the market. This includes the Barclaycard Initial at 29.9% representative APR (variable).

You will need to clear your balance in full each month to have the greatest impact on your credit score - and avoid paying sky-high interest charges.

10. Reap the benefits!

Once you have taken all the steps explained above, your credit file should be starting to look pretty good. And that means that you can start to think about applying for market-leading deals.

Offers that are currently available and could easily be within your grasp once your credit record is in order include the Marks & Spencer credit card, which gives new customers 15 months at 0% on purchases, plus a generous rewards scheme and a representative APR of 15.9% (variable). Alternatively, you could consider a £10,000 loan with Sainsbury’s Finance at just 6.8%, which you can choose to repay from one year up to five years, or if you have a FlexAccount with Nationwide Building Society you could take out the same-sized loan at a representative APR of just 6.7%, again with a choice of repayment periods from one up to five years.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

We’re free, independent and compare all UK loans and credit cards, as well as offering exclusive deals you can’t get anywhere else.

Contact moneysupermarket.com at Moneysupermarket House, St David’s Park, Ewloe, Flintshire, CH5 3UZ. © Moneysupermarket.com Ltd 2011

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