Even the smallest of issues on your credit score could affect your eligibility for big things like a mortgage, loan, or credit card. It can even affect whether you can get a mobile phone contract!
The good news is that it’s easy to restore a bad credit reputation. It takes some time, but it IS possible.
Knowledge is power: when you know what might be causing your low credit score, you’ll know what you need to do to sort it out. Let’s take a look at the most common offenders!
- Co-signing a loan
- Opening lots of new accounts
- Applying for lots of credit in a short space of time
- Closing (or not closing) old accounts
- Increasing what you owe on your credit card
- Missing payments
- Holding bad debts
- Applying for credit after a rejection
- Holding a payday loan
- Frequently transferring credit card balances
- Incomplete identity files (or moving home frequently)
- Fraud and identity theft
Phew, that’s a lot to get through! Let’s get started.
You’re in a financially stable position – but a friend, adult child, or partner isn’t. They need a loan – but lenders won’t provide one to them.
The option here is to ask you to be a guarantor – or co-sign the loan. This means you’re jointly responsible for the amount borrowed. If they don’t keep up repayments, and don’t tell you, these defaults will affect your credit file, too.
Co-signing a loan where you take over the repayments won’t necessarily affect your credit rating – it’s a much bigger problem if the other person’s credit score takes a dive and they don’t tell you BEFORE they miss even one payment.
It doesn’t matter if you’re opening several bank accounts without overdrafts or a new mobile phone contract. The more accounts you open in a short space of time, the harder a hit your credit score will take.
The good news here is that, unless you’re suddenly taking out huge amounts of credit in the form of loans, store cards, or credit cards, your score will bounce back quickly. You’ll see your credit report go back to normal in three or four months.
If you have a low credit score because you haven’t applied for much (or any) credit in the past, you’ll notice a bigger hit. If you’ve got a good score, opening lots of accounts won’t have so much of an impact.
You don’t need to open lots of lines of credit to affect your score, either.
If you make lots of applications for credit in a short space of time, this will definitely lower your score. When you’re rejected for credit – even for things like store cards or mobile contracts – your score takes an even bigger hit.
Try to space out your credit applications – ESPECIALLY if you’ve recently been declined.
Don’t panic TOO much, though.
Lenders tend to only check one of the three main credit reference agencies when they decide if they want to give you credit. If you’ve been rejected, the dent may only affect one of the three agencies.
If you have plans to apply for something really important in the next year or so – like a mortgage – try to limit all account applications and new lines of credit. Even one rejection could dent your score enough to set you back on your bigger goals.
You might think it’s a good idea to close all of your old accounts that you never use… but stop!
Credit lenders look at the total amount of credit currently available to you. They then look at what you use of that limit. The lower amount you use, the better you are in their eyes.
For example, let’s say you have an old credit card with a £2,000 limit. You never use it because you have another card that gives better rates, cashback, or offers. Let’s assume your other credit card has a limit of £3,000, and your current balance owing is £1,000.
With both cards together, you’re using £1,000 of a total £5,000 credit available to you (20%). If you close your old credit card, you’re now using £1,000 of £3,000 available to you (33%). To a lender, it looks like you’re using a higher amount of credit.
The age of your accounts counts
As well as giving you a lower percentage of credit usage, your old accounts serve a second purpose. Lenders look at the age of your accounts. Someone with only very recent accounts is seen as more unreliable – but one you’ve held for years will help boost your score.
Tips for Credit Card Accounts
If your credit card has an annual fee that is causing you to cancel the account, call the credit card company .See if they will waive the fee in exchange for keeping you as a customer, or give you a different card with the same limit that doesn’t have a fee. If you must close an account, call up another one of your credit card companies and get them to raise the limit on your other card so your total available access to credit remains the same.
Tip: This factor will affect your score more if you have a thin file. Also, if you already have a very high score, you won’t need to worry about this factor as much since even if your score is lowered a bit, your score will likely still be considered high.
If you’ve recently increased your credit limit on an existing card, this can dent your credit record for a short time. It’ll stay lower for longer if you max out the new limit, or stop paying your card off in full every month.
Typically, a maxed-out credit card can decrease your score by 90-110 points. If you’ve got a high credit score, that’s not too much to worry about – but if you have a lower score and max out your card, you’ll drop around 55-75 points. This can have a significant impact on your borrowing eligibility.
If you can get your balance back down to less than 30% of the total borrowing limit, though, you could see your score bounce back in as little as two months.
Almost all of us have missed a payment at some point in our lives. It’s easily done unintentionally: life gets busy and you forget, or you move house and haven’t updated your address yet.
Try to reduce these errors, though, because every late or missed payment will have an impact on your credit score. Late payments are less detrimental than ones entirely missed – but they’re still not good.
A high credit scorer could lose as much as 100 points for a missed payment. The longer it takes you to settle the outstanding balance on the account, the worse the impact is on your score. It can take two years or more for your credit score to recover.
Nobody likes to pay for something when they’re right about what’s owed. If you’ve ever contested an account – such as mobile phone charges – it’s tempting to withhold payment until the matter is sorted.
However, withholding payments affects your credit score. The credit reference agencies don’t see the nuances of your dispute: they just see a missed payment.
You’re always in a stronger position to pay the bill and dispute it after the fact. This stops bad debts interfering with your credit score – especially if you might have to end up paying the full amount after all, anyway.
What you don’t want is someone sending this disputed debt to a collection agency. As soon as that happens, it can dent your score significantly for SEVEN YEARS.
Types of Bad Debts
Bankruptcies show up on your credit report for a very long time. Your bankruptcy will show on your credit report for seven years – AFTER the debt has been cleared. This means you could take six years to clear your name after the initial 12 months required to become a discharged bankrupt. After those seven years, your credit score will (very slowly) increase.
If you’re worried about your debts, speak to a free debt management advice service like StepChange to get ahead of your money worries before bankruptcy becomes the only option.
Even after you’ve paid them off, tax liens can remain on your credit report for seven to ten years, depending on what state you live in. Unpaid tax liens will remain on your credit report indefinitely in many jurisdictions.
Lawsuits and Judgements
A judgement is the official decision of a court in regards to a lawsuit. If a court decides that you owe someone money, this judgement against you can remain on your credit report for seven years once filed.
The most common judgement is a County Court Judgement. This can be raised against you for even small amounts – and they can even be raised in error. Council Tax payment issues are one of the most common causes of this.
Local councils have automated systems to raise court summons for unpaid bills – even if the resident is currently working out a plan or dispute with the council. If you ever receive a court summons from your local council make sure you act on it IMMEDIATELY. Contact the council to request the summons repealed. If they refuse, make sure you attend the hearing to explain the situation.
Universal Credit advance payments can also result in a CCJ. When you get a job after being on Universal Credit, if you haven’t repaid any advance loans in full, you need to do this sooner rather than later. Your employer can be summoned to deduct a proportion of your salary to pay off the debt – if this happens, especially if it takes a while for your employer to act, your credit file could be affected.
As tempting as it might be to have your payment troubles end by simply allowing the lender to take back whatever the item is that you are making payments on, resist! A repossession could end up showing up on your credit report as a bad debt (even though the repossession settled it), and lead to a lower credit score.
Unpaid Child Support
Child support payments that aren’t paid can remain as bad debts on your credit report indefinitely, or until you clear them up.
Random Troubles You Should Look Out For
Even simple things like a parking ticket you forgot to pay could end up with a collections agency and appear on your credit report for seven years after you settle the debt. When you move, be sure to pay off all utility accounts in full (cable, internet, telephone, electricity, et cetera), since they could also be sent to collections if you forget and, you guessed it, that will be a black mark on your credit report.
When you move house, it’s always worth using the Royal Mail redirection service for at least six months. This protects you from identity theft as well as makes sure you get all relevant notices about final bills, credit card statements and such.
If someone garnishes your wages (also known as a wage attachment), this can also damage your credit score. Do everything possible to avoid having your wages garnished for any reason. Here are some of the more common reasons why people have their wages garnished, some of which don’t even require a court order:
- Child support payments
- Divorce settlement payments
- Student loan payments
- Unpaid taxes
- Unpaid consumer debt such as credit cards
Keep in mind that wages are not usually automatically garnished for those kinds of debts — garnishment is typically used as a last-ditch effort to get money owed. So as long as you pay your debts on time, whether support payments or taxes, odds are high that you’ll never experience having your wages garnished.
Don’t apply for any new loans or credit cards if you need your credit score to remain at its maximum possible score for the near future.
For example, if you’ll be applying for a mortgage next month, don’t apply for three new credit cards for their amazing sign-on bonuses. Typically, whenever you apply for new debt whether a loan or a credit card, your credit score will take a temporary dip due to the credit check that will be run on you. If your credit score dips too low, you may end up getting penalized by a higher interest rate on that mortgage you want, or worse, being denied altogether!
A rule of thumb is to avoid applying for any unnecessary new credit in the six to twelve months leading up to your mortgage application.
Finance company loans – such as payday loans or store repayment plans – affect your credit report differently to a major high-street bank loan.
That’s because the companies that offer this type of loan target consumers with poor credit. So, if you’ve got a connection with one of these companies, other lenders will see you as a higher lending risk.
Be wary of the following types of loans — they may be finance company loans which could lower your score:
- Furniture store payment plans
- Electronics store payment plans
- Loans from companies that specialise in lending to people with bad credit
- Some car loans
- Payday loans
Whenever the lender for any of the above is not a proper bank or credit union, there is a chance it is a finance company loan. Be on guard! The more of those types of loans you have on your credit report, the more likely they are to have a negative impact on your score. The simplest solution is to avoid these kinds of loans altogether.
While it’s generally considered harmless to transfer a credit card balance to another card to take advantage of a lower rate once, doing it repeatedly will look bad on your credit report. By all means, take advantage of that lower interest rate, but choose wisely so you only have to do it once.
Usually the credit agencies are pretty good at figuring out who you are, despite the fact that your name may have changed due to marriage or divorce, or that you may sometimes use your middle initials and other times not.
But if you’re unlucky, they may make a mistake and fragment your file — for example, putting everything under your maiden name in one file, and everything in your married name under another. Or putting everything under your old address in one file, and everything since you moved to different state in a brand-new file.
Depending on your circumstances, this could thin out your file so much that you end up with a lower score than you would have if everything was in a single file, as it’s supposed to be. So if you check your credit report and find more than one file for yourself, contact the affected agency immediately to start the process of fixing this.
Moving several times will affect your file, too
When you’ve moved house a lot in a short space of time, you’re considered a higher risk. This isn’t fair to renters: many are forced to move as their rent increases or landlords decide they want to sell their property.
If you have lots of addresses on your file in the last ten years, this will affect your credit score. Even if you’ve got great credit history, moving a lot makes you look ‘flighty’ to lenders – and therefore higher risk.
Make sure you always register on the electoral roll whenever you move. This will help to legitimise each home move in lenders’ eyes and help your credit score.
If you’ve been the victim of identity theft, the perpetrator may have trashed your credit score in the process. Take steps immediately to put a stop to it and protect your accounts:
- Contact all three of the major credit bureaus to inform them of the fraud (Equifax, Experian, and TransUnion).
- Ask one of the major credit bureaus to put a fraud alert on your account (this alert will then be automatically put on your account at all three bureaus).
- Contact the police and ask them to file a police report.
- Contact Action Fraud for more help.
- Freeze fraudulent accounts.
- Keep meticulous records of all communication.
The good news is, now that you’ve armed yourself with intel on credit score pitfalls to avoid, you’ve increased your chances of achieving, and keeping, a high score!
“Perseverance, secret of all triumphs”. Victor Hugo