You realise there is a problem when you want to purchase an item from a store on credit and after filling in a lengthy application form, find that you have been refused. The only explanation given is to get in touch with the credit reference agencies and find out what information they are holding about you that has caused the problem.
The three main leading credit reference agencies in Britain are Equifax, Experian and Call credit. These are agencies that retain all the information about your credit history. Any loans or store cards acquired on the address where you reside are recorded by them. In fact they retain credit search information for a period of between 1 to 2 years but for other serious matters like insolvencies or County Court Judgements (CCJs) information is retained for six years on their files. Previous addresses where you have resided will also apply when new credit is being sought.
The information held by the credit reference agencies is accessed by loan providers each time you apply for a new loan or credit. This is called a credit check and is done to find out if you are worthy of getting additional credit. Information supplied on the application form like your name, address, employment details and annual income is combined with any previous credit history to generate a credit score. All lenders have their own computer generated criteria that they use to evaluate every new applicant’s credit score. Based on this credit score the lender makes a final decision if you are worthy of getting that new loan or not. The credit score is a number between 0 and 1000 and the higher your score the easier it is for you to obtain credit as you present less of a risk to the lender. This score is based on the following criteria:
Payment History. This will be a history of all your payments that you have made to your creditors. Late or missed payments will lower your credit score as will County court judgements or a filed bankruptcy. If you have made arrangements with your creditors to pay less than what was initially agreed than this too is added to your credit file.
Searches on your credit file. Each time you apply for credit a search is done on you by the lender and this is recorded on your credit file. The more searches that are done on you the lower your credit score.
Number of accounts. A large number of accounts showing on your credit file means that you have a large number of credit, store cards or loans. Whether these accounts are active and being used or not active can also lower your credit score.
Money Owed. A large amount of money owing to lending institutions is another factor that decreases your credit score. Also using up the maximum available credit on your credit cards can make you more of a risk and leads to a lower score.
It is important to check your Credit report on a regular basis to keep up with any changes that might have occurred in it. For a nominal fee you can access your report online and you will be immediately notified of any activity on your report. Any financial institution that does a check on your credit report is listed on the report in addition to the date on which the check was actually done. Therefore checking your report regularly makes you aware of changes in your financial affairs as they happen.
If you notice anything in your previous credit history which seems incorrect it is important to inform the agency immediately so that this is corrected and your credit status is accordingly amended. There have always been cases reported where credit reports have continued to carry on debts that have been cleared and are no longer active. Any changes that you report will appear on the report after about 6 weeks or so.
In some cases due to the theft of credit cards or bank statements and other financial statements a person’s identity has been fraudulently used to obtain credit. This is called identity theft and can occur when someone has obtained your personal and private details and is using them to apply for loans and credit in your name and at your residential address. The theft is only discovered when the credit card or bank statement arrives a month later in the post and there is activity on it that is totally unrelated to you. Similarly it might be a phone that has been fraudulently purchased or some other item and it is only at the end of the month when you do get the statement of that particular company that you discover the theft.
The whole procedure of informing the relevant authorities will take time and you might end up being late in making your monthly payments to the companies that have been involved in this identity theft. You end up with a black mark on your credit report and a lower credit score because of someone else’s criminal activities.
It is therefore imperative to keep a check on your credit report as any new activity will alert you and you can stop it from going any further. If you are a victim then contact the relevant credit card company and inform them of the theft immediately. There are departments that have been set up precisely for this purpose and they will take relevant measures to investigate the claim further.
Also inform your credit agency about what has occurred so that no unnecessary details are added to your file until the investigation has been finalised. Usually your credit report is flagged with a fraud alert. This alerts other companies not to issue credit to anyone applying for credit under your name. The alert can stay on your file until it has been successfully resolved. For future security make sure all documents with your personal information are shredded rather than throwing them in the bin and keep your PIN numbers safe. Also be cautious about giving out your financial details openly on the internet or on the phone to anyone.
If you are in the unfortunate situation of having an adverse credit rating there are ways you can turn this around so that the situation becomes manageable. You can take the following steps to improve and repair your credit score but remember that this cannot happen overnight, it will take time before the steps you take have the desired effect of repairing your credit history.
1. The quickest way would be to get a loan from a family or a friend and pay off all outstanding credit and store card debts. This is a desirable option as the relative or friend might not charge you a high rate of interest and in some cases might not charge any interest at all. Their main interest is getting back a fixed, affordable amount of the capital sum back every month. This option also does not involve any more credit checks and no entries are therefore registered on your credit report.
2. Borrowing more money from lending agencies to pay off loans is not a recommended option as not only will a refusal show up on your credit history but do keep in mind the interest rate that is being charged as some lenders charge a higher rate of interest if they know you are of higher risk.
The APR (annual percentage rate) is the interest rate that you pay for your loan and depends on the length of the loan, the frequency and the amount of the instalments that you will pay to the lending institution every month. Lenders normally tell you what the APR is before any agreement is signed and it can vary from lender to lender. Do try and shop around for the best deal available in the market before you commit yourself to a lender. If you have already agreed to accept a loan then try and negotiate a lower rate of APR rate if possible.
3. You can also consider a credit card consolidation, when you transfer balances from all your existing credit cards onto one credit card. There are credit card counsellors who help you to do this by corresponding with the credit card companies and negotiate the best deal in it for you. The benefits of this consolidation include lower interest rates, reduced monthly payments, and relief from late payment fees. There is also only one smaller payment to make rather than a number of large ones to various credit cards.
This is an unsecured consolidation and is usually done for debts that do not exceed a certain amount. If the sum you owe on credit cards is quite a large sum then a secured loan might be recommended. This means that the loan is actually secured on your house or any other asset that you might possess. In case you do not keep up the repayments on this loan then the asset that you have secured on this loan will have to be sold in order to pay back the lending institution the amount that you have borrowed from them. This is an option that has to be seriously considered because it might mean that your home is at risk if you do not keep up the payments on your loan.
If your credit card debt is not a lot then it is worth checking out the credit card companies that are offering competitive deals on their credit cards. This is the offer of 0% balance transfers for a year and some for even 15 months. This means that you can transfer a debt from another credit card that might be charging you a 15.9% rate of APR to another card that is not going to charge you any interest for a whole year or 15 months. There might only be a small balance transfer fee that will be applied according to each individual credit card company and in addition there are annual charges that vary with each credit card.
The main way a person can benefit from this transfer is if the transferred balance is cleared within the year or 15 months. After this period the interest rate will be put back in line with the market rate at that time. If there is an amount still remaining on the debt then you can transfer it to another card that might be offering a new deal of 0% balance transfer. If this is a deal on a card that you already have in your possession then it is advisable to take them up on their offer and transfer the remaining debt on this card. If this is not the case then you can apply for another card that is offering this deal on balance transfers.
The only disadvantage of this is that every new credit card application appears on your credit reference file and the more accounts that are opened the more of a risk you appear to be to them.
4. You can also contact debt counsellors for any other debts that you might have like a home loan or loans from other companies. They will take over the administrative aspects of all your debts and make arrangements with your creditors to pay off a small, affordable amount every month. He or she will enquire about any income that you have and will work out how much you can afford to pay every month out of that income. The hassle of corresponding with creditors, which is very stressful for some people, is taken out of your hands and all you do is make sure that the monthly amounts are paid every month. They will ask the creditors to freeze the interest in the meantime so that the debt does not continue to pile up while you are trying to pay it off slowly and in exceptional cases they might persuade the creditors to write off the debt if they convince them that this is a genuine bad debt and cannot be repaid.
5. If you prefer to handle your finances yourself rather than talking to a debt counsellor then get in touch with all your creditors yourself and inform them of your financial situation immediately. By continuing to miss monthly payments or making them late you are continuing to affect your credit rating adversely because any late or missing payment continues to appear in your credit file with the effect of decreasing your credit score even further. In addition to this the credit card companies will continue to impose late charges to your existing debt with the effect of increasing it even further.
Most of these companies have departments that deal with customers who are facing financial problems and they will talk you through what to do next. Again an income and expenditure list has to be sent to them and they will agree with you the amount you can afford to comfortably pay them each month without getting out of pocket. After this has been agreed upon, payments have to be made each month on the date agreed. Do try to stick to the payments every month to build up your credibility and also to get rid of the debt that has piled up. Also try and ask them to refund you any late charges that are added to your account so as not to increase the debt even further. There are some companies that are sympathetic and refund late charges if they are offered a genuine explanation.
In some cases if you negotiate with your lenders they might agree to a full and final settlement which is a smaller amount to what you previously owed to the company.
6. If you have any spare money left after all the monthly payments are done to your creditors, leave it in your bank account to build up savings. This adds to your good reputation with your bank which bases any future borrowing on how you behave with your money and savings always reflect prudence which is a good quality to have. On the other hand if you are using all the funds to repay debt do not decide to close your existing bank account. Leave a small amount of money in your bank account to leave it open. It is sometimes difficult to open new bank accounts if you have an adverse credit history and again if a new application is refused your credit file will note this accordingly.
These days it is a common fact that most people are undergoing financial problems. The economic conditions of the country and the downturn in the housing market have all led to financial strains on all of us. It is advisable to seek financial help and advice the moment you realise that the amount of money that you are earning is not sufficient to meet the repayments on all the debts that you owe.
Keeping an eye on your finances is the key. Keeping regular checks on your credit file will keep you aware of all the information that is being held on your financial activities. Until you find additional ways to enhance your income do seek help from the experts that are available to help you cope with your existing situation. There are citizen advice bureaus available in every part of Britain that offer people free advice on how to get out of debt and stay out of debt. Meanwhile the credit card companies and banks are learning to be more sympathetic towards people as long as they are made aware of the situation the moment it starts. In this way help can be given earlier and a lot of the resulting stress and anguish reduced.