If you’ve applied for credit and been unexpectedly rejected then this may have something to do with your credit rating. A credit rating is basically an overview of the way that you have managed your money and credit in the past. It is data that is made available to lenders by credit reference agencies that will reveal information such as how much you’re borrowing, how well you’ve made repayments and how often you’re applying for credit. Lenders use their own “rules” to turn this credit rating data into a credit score, and then use the score as a means to decide whether to lend or not.
A poor credit rating may not seem like the end of the world but it can have an impact in many ways. For example:
Rejection of credit card loans and applications
Only being offered high interest credit
Higher insurance premiums
Being unable to take out a mobile phone contract
Difficulty getting a car loan
Being denied business start-up finance
What causes a bad credit rating?
There is no single credit rating that every lender can see to make a judgment when it comes to your finances. However, there are a number of factors that will drag your credit score down whichever credit rating agency you refer to. These include:
Not sticking to the terms of another credit agreement. For example, you may have signed up for a personal loan but then not made repayments each month, as agreed. Even just making loan repayments late can have a negative impact on your credit rating.
Making only minimum repayments. If you’re doing nothing but paying off as little as possible on credit cards, for example, this could also negatively influence your credit rating. Many lenders see this as evidence of being unable to manage money and pay off debts.
You’ve never had any credit. It might seem that being completely free of debt in the past would make you an ideal candidate for a lender now. However, that’s not the case. If you haven’t borrowed before then there is no evidence of good money management on your file and this can make it just as difficult to borrow now – and at a good interest rate – than having a history of bad credit decisions.
Being declared bankrupt. If you’ve struggled with credit in the past and ended up either with an Individual Voluntary Arrangement or having a County Court Judgement against you this will have a very negative impact on your credit rating.
Making too many credit applications. Although the various credit agencies rate this differently, roughly 10% of your credit rating is affected by the number of credit enquiries being made. So, if you’ve recently made multiple credit applications – especially if all have been denied – then this will negatively impact on your score.
Inaccurate, false or fraudulent information. The information in your credit file needs to be accurate in order to reflect your genuine creditworthiness. Your credit rating may be low if, for example, you are not registered on the electoral roll. You’ll see a significant drop in your credit rating if you’ve been the victim of fraud and someone else is spending credit in your name. Even incorrect address information could have an impact.
What can you do to fix a bad credit rating?
Make your payments on time to show a pattern of good borrower behaviour
Reduce some of the balances you currently have outstanding, even if only by a little
Check your credit report and make sure all the information is accurate. Look out for any activity you don’t recognise that could be evidence of fraud
If you’re struggling with the debts you already have don’t apply for more credit. Seek help in managing and paying off those debts
Wait at least six months before making any more applications for credit that will result in enquiries on your credit file. Wherever possible ensure any credit provider uses a “soft search” to assess an application – then there will be no footprint on your credit file.
If you don’t have any credit history then apply for a credit card or personal loan, even if the interest rates are not favourable. Pay this off in line with the credit agreement to start to establish positive borrower history
Alex Hartley is a keen advocate of improving personal finance skills. She's worked at Solution Loans since 2014 and written hundreds of articles about how people can manage their money better. Her interest in personal finance goes way back to...Read more about Alex Hartley