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By Russell Cavanagh Staff Writer
Monday, 29 September 2008
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ALTHOUGH the credit industry is generally tightening up on who it lends to, being at the bottom of the heap is without doubt demoralising. But it needn’t be that way.
There are steps you can take to build a good credit history, improve your status and perhaps gain access to high street credit within six to 12 months.
How does it work?
How credit status is decided
Your credit status should be assessed on your income and overall financial situation.
This process is called ‘credit scoring’ and usually takes place when you apply for credit of some sort, such as a loan or applying for a credit card.
During the credit scoring process, lenders will look to see if you had credit difficulty or account misbehaviour problems with them in the past. If so, it is unlikely they will lend.
With this hurdle out of the way, your chosen lender should ask one of the major credit reference companies for information about you and your credit behaviour over the past six years.
The major reference agencies are Experian, Equifax and Callcredit.
These credit reference companies all hold data about you and anyone financially associated with you – such as a spouse, civil partner, someone you cohabit with or have taken out credit with jointly.
They get information from the Electoral Roll, court records and from your other creditors.
Defaults on mortgages, loans, credit cards, etc, within the past six years should show up on your file.
First steps to improve credit status
The very first step is to make sure you are entered on the Electoral Roll.
This provides creditors with evidence of who you say you are and that you live at the address you gave them. Your local authority (or ‘council’) can advise you on how to get registered.
The next step is to request a copy of your credit reference file from one of the three main agencies (addresses on the sidebar). You can do this either online or by post. Your file can take up to 28 days to reach you and there may be a small charge.
Check your reference file for errors once you receive it. You may find a county court judgment or record of defaulted payment on a debt that might actually not belong to you (perhaps someone with a similar name). Maybe somebody you previously lived with has a bad credit history and the reference agencies assume you still live together? Is someone you once borrowed jointly with in financial difficulty and this is now causing you these problems?
There can be lots of reasons for an error and it is possible to contact the reference agency and put them right so they will correct your file.
Avoid asking for a copy of your credit reference file too many times as lenders can find this out and think you are applying all over the place for credit because you are a bad risk.
Next steps
With existing credit, make sure contractual payments are resumed with an additional amount agreed towards arrears.
If you can't afford to do this, you perhaps should not be trying to take out new credit at all and instead seek free, independent debt advice.
You may be able to transfer your problem debt onto a low interest or 0% APR balance transfer credit card but this option may not be open to you if you have credit problems.
You might consider a credit card for poor credit scores to build a good record of payments.
There are four of these on the market currently. They carry higher APRs - between 27.9% and 39.9% - than the average mainstream credit card and are designed for people with no borrowing history or bad credit status.
Credit cards for poor credit scores from Barclaycard, Capital One, Aqua and Vanquis offer up to 51 or 56 day interest-free periods in which to clear balances off in full. The high interest means they require extra special care and should be used very sparingly.
The Aqua and Vanquis cards attract an even higher rate of interest if used for cash withdrawals at ATMs or cash-back in stores or supermarkets.
Barclaycard and Capital One Classic do not, and actually charge the same interest on all transactions, including balance transfers.
Also be aware there is no interest-free period for any of these four cards on cash transactions so substantial interest would apply immediately and without a free period.
However, restrained use and carefully managing repayments in full and on time should build your credit status to the point where mainstream cards become an option after six to 12 months.
Summing up
Credit scoring by lenders is getting tighter and references to credit agencies treated more seriously than ever.
Make sure you're properly registered at your address. Check – and amend if necessary - your credit reference file.
Consider getting a “poor history” credit card and use it carefully; making small purchases you can pay off easily.
This should give an opportunity to show you can repay borrowing reliably, increase your credit status and get you on your feet well within 12 months.
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