How to improve your credit rating in five easy steps
Credit score serves as a basis for your credibility. When you apply for a loan application, a lender or bank will look at your credit report to determine whether or not they should give the nod.
Although you know the fact that you should have a higher credit rating to avail yourself of lower interest rates, many of you struggle to have a credit file up to scratch. Not to mention, fixing issues in your credit report takes a lot of effort.
The impact of a missed payment will stay for two years, and the default will stay for a longer time. Even if you clear your dues, you will see no improvement in your credit score. While you cannot control all factors contributing to strengthening a credit score, there are some things you can take care of.
Where do you stand?
Before you take the plunge, you should know what your current credit score is. There are three credit reference agencies – Experian, Equifax, and TransUnion. As a lender can get your report from any of these agencies, you should check your credit report with all three of them.
The information they retain about you is used to calculate your credit score. Each lender has their own numbering formula to determine your score, but the higher, the better. Not only does a credit score decide the interest rates you will be charged, but it also could have an impact on the size of the loan.
Tips for doing up your credit rating
Here are the tips to improve your credit score:
Check for errors in your report
It is asked to check your credit report in the first place because it may have some unidentified errors that can take a toll on your credit score. You are allowed to have a copy of your credit file from any of the agencies at any time.
You should see if it shows a default that you do not know. If so, it could be a case of identity theft. Talk to the credit bureau immediately to ask them to make necessary corrections. It cannot be done immediately. Even though it is a big mistake on the part of credit bureaus, they will first verify with the lender if that entry is incorrect in their record.
It will take a month to make corrections.
Build a credit history
In order to avail of lower interest rates, you should have a credit history. If you have never taken out a loan, you will end up being charged a higher interest rate. A lender wants to know that you stay committed to payments, and they can get an idea about your loyalty only when you have built a credit history.
It is a case of catch-22 – you will struggle to borrow money without a credit history, and you cannot build a credit history unless you borrow money. Seek credit builder loans. Interest rates will be higher for sure, but as you will be paying down the debt over a period of months, it will help build a credit history.
Timely payments are a must to have a good credit score. If you do not take kindly to these loans, you should use a credit card. While some cards allow you to pay off the whole balance on the due date, some cards will allow you to pay back in installments.
These payments are also subject to interest, but they will likely be much cheaper than credit builder loans. If you already have a bad credit score, it will be quite hard to touch the good credit score range.
You cannot turn back the clock – what has happened has happened – but you can prevent the damage from becoming worse. Lenders generally bother about the latest defaults and missed payments.
If they are too old, chances are that you will get better interest rates.
- Keep paying off your energy bills on time.
- Make sure you do not fall behind on rent.
- Pay off the credit card balance within the grace period.
Keep credit utilisation ratio low
A lender looks at your debt-to-income ratio. It means how much debt accounts for your income. Ideally, it should be up to 30%. The higher the debt-to-income ratio, the higher the interest rate will be.
The credit utilisation ratio also determines whether the debt-to-income ratio will go up or not. You should try to use as little of your credit card limit as possible. A rule of thumb says that it should not be more than 25%.
Keep older accounts open
It is often tempting to close older accounts that you do not use, especially if they charge monthly fees, but this will increase your credit utilisation ratio. With more accounts open, you can show you had a healthy history of borrowing money in the past. You will be highly likely to get signed off on by private money lenders for bad credit people.
If you are living with your partner, it is more than likely that your partner is responsible for all types of debts. This would make it difficult for you to build your credit score. To avoid any implications of it borrowing down the line, you should try to split its bill payments.
Having your name on some of them will help show your lender that you stick to your payment obligations.
The bottom line
A poor credit score will make it challenging for you to have a loan approved, and if a lender does so, you will end up being charged a higher interest rate. Therefore, you should try to work on ameliorating your credit report.
The damage cannot be reversed, but you can prevent it from further becoming worse. Try to clear all your debts. Make sure you pay all your energy bills, rent, and mobile phone bills on time. Use a credit card sensibly.
If you o not have a credit history, you should build it with the help of credit builder loans.