Credit Rating – Its Importance and How to Improve It

Credit rating is becoming more important than ever. Even if you’ve resolved to lead a debt-free life, maintaining a good score will help you in more ways than one. If you’re looking for a good pay-monthly mobile phone deal, the company will run a check to determine if they’re able to trust you. Want to split car insurance premium in convenient 12-month chunks? Again, a good score will mean you’re not overpaying too much.

And obviously, very few of us will escape every possible type of loan. Things like car leasing or car finance is something that is essential especially if you insist on driving a new vehicle. Getting the best possible APR on your loan is the best you can do to minimise your expenses but getting a favourable APR is impossible without a good score.

Lenders use your credit score to determine whether or not to give you a mortgage, loan or credit card. This is not just about getting approved; your creditworthiness also determines the amount of credit and the level of APR you are given. Increasingly, employers are even asking for permission to examine the credit reports of their employees. While most employers don’t expect a perfect rating, they do want to see on-time payments and reasonable utilisation of credit resources. If your credit rating is not as good as you’d like, here are some ways you can improve it and you will be surprised how much money it actually saves along the way.

Review Your Credit File Regularly

Review your credit report regularly to ensure that the correct information is being reported. Look for any unusual activity or suspicious accounts opened in your name. Make sure your address is up-to-date and that you’re registered to vote at that address. Many lenders use the electoral register as a precaution against fraud.

If you’re not registered at your current address, it may hold up your credit applications. A good place to start is to perform a self assessment using this credit rating tool. As accurate as it may be, it only bases its assumptions on what you’ve told it. You still want to get access to the actual file. Although the main rating agencies like Experian will charge a monthly fee for allowing you access to your files, you can occasionally use the free trial. Don’t forget to cancel it after a month, otherwise you will be charged recurring payments.

Make Corrections

Make corrections to your credit report as necessary. If there are negative items on your report that occurred during a financially stressful time such as after a job loss or divorce, make a notice of correction to your credit report to indicate that. It is also helpful to complete a disassociation form whenever a relationship ends, and you’re no longer financially linked to that person.

Space Out Credit Applications

Each time you apply for a loan, credit card, mobile phone account or utility contract, your credit is reviewed. This leaves a footprint on your credit report. While these footprints do not lower your rating, too many of them, especially within a short period of time, may suggest that you are in financial distress. Spread your applications out to avoid this problem. And make sure that the lender you apply to is using fair methods. Many brokers will multi-propose an applicant to many different lenders creating many footprints within a short period of time. If in doubt, ask before you apply.

Use Credit Responsibly

When you are approved for a line of credit, make sure to use it responsibly. Make your payments on time every month, and pay more than the minimums whenever possible. Missed or late payments can remain on credit reports for six years or more. Keep your utilisation low – at about 25 percent of your credit limit.

A lower utilisation indicates a lower risk for lenders and employers. Stay within your credit limits to avoid overdrafts which may negatively impact your credit. Close any accounts that you don’t use. Lenders look not only at the amount of credit you’re using, but also the amount of credit available for your use. Having too many lines of credit available can seem risky to lenders.

If you have been turned down for credit recently, instead of putting in more credit applications, examine why your applications are being turned down. Follow the recommendations outlined above to start improving your credit rating. Once you have corrected any mistakes, made on-time payments consistently over a period of time and lowered your utilisation, you will find it easier to get approved for lines of credit.