In the aftermath of Christmas, many of us will be looking to consolidate our debts, with a zero per cent balance transfer credit card or cheap personal loan, to get financially fit in the New Year.
"However, just applying for the first one you see could make matters worse," says Kevin Mountford at MoneySuperMarket. "It’s essential to understand your credit profile first, to help minimise the risk of rejection or being offered higher rates than expected - and take action to improve it if needs be."
Use these steps to get your credit in the best shape:
1. Check your credit report information is correct
This is crucial in determining whether or not your application is successful. It’s important to understand your credit profile and to check for any errors. If you find a mistake, contact the credit reference agency immediately and ask for it to be corrected, as even minor inaccuracies could count against you when a lender uses your credit report to make a decision.
- Tip: It’s worth checking your credit file with the three main credit reference agencies, Experian, Equifax and Call Credit as information can vary. Statutory credit reports can be purchased from as little as £2.
2. Remember to pay on time
Avoid a missed payment mark on your credit file by paying your bills on time. A late payment could also be marked on your file as missed so, even if you are just making the minimum repayment, paying bills on time shows a lender that you are able to manage your finances effectively. It’s easy to forget so set up a direct debit or standing order to safeguard your payments however, lenders like it as it shows a true commitment that they will receive money from you every month. If you are unable to make a payment, don’t bury your head in the sand, contact your lender as soon as possible and explain your situation.
- Tip: Remember that it's not just financial firms that report to credit reference agencies; some energy providers, mobile phone operators, and insurance companies also report information to the agencies.
3. Close unused accounts
Financial companies look at the total amount of credit available to individuals, rather than just focussing on the amount they owe. It is therefore important to close any accounts you no longer use.
4. Avoid a high balance
Maxing out your credit card can be taken as a sign of financial stress. Not skating too close to the edge also eliminates the chance of you being charged for exceeding your limit and losing any introductory offers you might be on.
- Tip: Try to remain within 30% of your credit limit.
5. Register to vote
Most companies use the Electoral Roll to combat identity fraud so it is vital you are registered to be considered as a safe bet. Make sure you’re registered at your current address, or your application will be declined – even if your credit record is clean. Speak to your local council or sign up online.
6. Prove you have credit history
Demonstrating you are credit active and can be responsible managing credit is essential. Providers assess potential customers on their previous behaviour and will look for signs that you are capable of repaying money. While you don’t want to access too much, the trick is to build up your history slowly, as having no or little credit history can lead to rejection.
It is worth considering opening a line of credit to establish a history - even if you pay it off in full each month. Ensure you have a bank account and pay your bills on time as this will help to show that you can manage your finances and are a good candidate for credit.
- Tip: If you use a mobile phone then having it on contract and paying it in full and on time with a direct debit to prevent missing a payment can have a positive impact on your credit profile.
7. Be honest and take action
Always complete applications for credit accurately , lenders will be able to discover lies or half-truths easily and decline your application. If your circumstances have changed - such as redundancy or a divorce, then it’s important to say so rather than struggling to keep up credit payments in silence. If you’ve had a CCJ and it is now settled, make sure the settlement is recorded on your credit file, as they can bring your credit score down considerably. You can place a Notice of Correction on your credit file explaining the background to any arrears, for example, if you missed payments because of illness or unemployment. It is never too late to get back on track, clean up your act and get up to date with payments.
- Tip: Providers look favourably on those who can pay off loan agreements ahead of schedule.
8. Don’t over apply
Making multiple applications for credit is likely to have an adverse impact on your credit file, even if you haven’t been declined. It is best to leave a period of time between each application as many providers will see multiple applications as a sign of financial stress. If you have been refused credit, obtain a copy of your credit rating but don’t keep on applying everywhere else. Each search will leave a footprint on your credit profile - rejected applications to several lenders within a short period will show up and may damage your credit prospects. Avoid a scattergun approach and do a bit of research beforehand.
9. Show you are stable and secure
Moving home or switching jobs can impact on the chances of successfully applying for credit. Lenders want to know that you are ‘stable and secure’ so if you have moved a lot, this could have a negative impact as lenders may see you as a greater risk than someone who has been at the same address or job for a period of time.
- Tip: Having a bank account and a good banking history can reflect well on any application for credit.
10. Try Search Smart
MoneySuperMarket has a SmartSearch credit profiling tool to help those looking for the best credit card deals for their individual circumstances. Customers using the tool will be guided towards the credit cards and personal loans they are most likely to be accepted for.