A credit rating is a score that is used by lenders to help them decide whether you are a worthy borrower for the loan being requested.
It is used to assess the risk involved in extending that credit to you. Various information is taken into account, including your employment status, address history and current outstanding credit, amongst other aspects such as individual voluntary arrangements (IVAs), Trust Deeds or CCJ’s .
A mathematical model is used to come up with a score which is what then represents you as a credit risk as well as how you are likely to manage the repayments for the loan.
There are various factors which will affect your credit score, both positively and negatively and these can cause your score to change over time. Below are just some of these influencers:
-
Number of loans under your name
-
Credit searches (each time an application is made, the credit search history is recorded against your name and the more of these there are, the more these will adversely affect your credit rating)
-
The available credit on credit cards and store cards you already have
-
Total debt from all sources
-
How timeous your payments are
-
Public records such as the electoral roll
-
Any County Court Judgements
-
Salary
-
Age
-
Number of children
Having a good credit score, means that you are more likely to be accepted for the credit you require. It also translates to better interest rates and therefore paying only a minimal amount of interest over the term of the loan. Those with poor credit ratings will receive less favourable interest rates and will therefore pay back a higher amount overall. This is just one of the many reasons why it is important to try and improve your credit rating.
Here are some steps you can take to help improve your score:
-
Request a copy of your credit report and check to see that all the information contained within is correct and up to date. Do this regularly so that you can catch any anomalies quickly.
-
Make your repayments on time and be careful not to miss any payments.
-
Register to vote. Registering on the electoral roll provides lenders with a confirmed proof of address which positively affects your credit rating.
-
Do not make too many applications for credit.
-
Try to keep your income as regular as possible.
-
Avoid taking out too many contracts. This applies to mobile phones, electricity, gas and other utilities.
-
Close any credit accounts that are not in use.
-
Be sure to protect your identity. When checking your credit report, if you see any suspicious activity, contact the credit provider immediately.
-
Consider working with a credit counsellor if you are having trouble keeping up with monthly repayments.
If your credit rating is poor, don’t worry, in addition to the above, there are things that you can do which will help to increase your score. If you are already in debt, then an IVA or Trust Deed could help you improve your credit score and help you to manage your debts more effectively. Also, in some cases, you may be able to write off any unsecured debts depending on your circumstances.
Individual Voluntary Agreement (IVA)
An IVA is an Individual Voluntary Arrangement which is a legal agreement between you and your current creditors. It is a form of debt protection, so that as long as you adhere to the new (usually much lower repayment terms of the debt), you will be protected from those creditors taking action, pursuing you for the full amount of the debt. The creditors meet with the agents you have appointed to act on your behalf and will eventually decide whether to approve the new terms of the loan repayments as laid out in a proposal. An IVA can greatly help to lessen the stress involved with paying back mounting debts and can help to improve your credit score in the future.
Trust Deed
A Trust Deed is the alternative to an IVA which is not available in Scotland. A Scottish Trust Deed can help you to pay off your debts on your terms, according to what you can realistically afford. It is also a voluntary agreement between you and your creditors that is a legal contract once agreed, allowing the creditor to recover some of the money that you owe them, but in such a way that you can manage to pay.
Both IVAs and Trust Deeds are alternatives to bankruptcy and therefore more favourable for most people who find themselves in debt.