Applying for credit – Everything you need to know!

There are many reasons you’re going to want to apply for credit. Understanding how the system works will give you a greater chance of success and also in acquiring a suitable interest rate.

What you should do

When looking into borrowing money you should always consider what type of borrowing is appropriate for you, what you can afford given your income and outgoings, and at what rate you can comfortably afford to pay it back. You’ll need your employers name and address, your bank details, and proof of your income or salary. You might also need details of any other existing or previous loans or credit cards.

Here’s a list of points you should consider to give yourself the best chance of receiving credit at preferable rates.

Credit Score

Your credit score will be utilised by a lender to determine if you are a low- or high-risk applicant for credit. Your score will more than likely be based on your credit history. Your credit history is a record of how you’ve handled debts in the past and how much money you’ve borrowed past and present.

Everybody has three credit scores with three different agencies. These agencies work in slightly different ways in how they gather their information by accruing data from different banking and lending sources. Each lender may utilise a different agency or a combination of them so it’s important to regularly check your rating with each and resolve any issues highlighted in your reports.

The three agencies are; Experian, Equifax and Callcredit. You can access your credit reports online and different sites will access different agencies. Some will charge for the service and some will give you access for free.

Try these links in order to access yours:

Equifaxhttps://www.equifax.co.uk/Products/credit/statutory-report.html

Experianhttp://experian.co.uk/consumer/statutory-report.html

Callcredithttps://www.noddle.co.uk/

Credit History

There are ways to build a credit history and raise the level of your credit score. A higher credit score means you are a lower risk and more likely to be accepted for your loan or credit application.

Open a bank account. Setting up and efficiently managing a current bank account demonstrates a good relationship and responsibility to your finances.
Some current accounts will offer you an interest free overdraft facility for a fixed term as an introductory offer. This could be used as a short-term alternative to a credit card or a loan. You must however consider your repayment plan as any poor management and additional charges could be taken into consideration with your credit score.

Set up direct debits. This is another way of showing how well you can manage your finances, but always make sure you have sufficient funds to make the payments. Failure to make a direct debit payment will count against you. In the worst-case scenario it could lead to a county court judgement that will affect your rating considerably and stay on your record for six years.

Register to vote

Being on the electoral register shows lenders you are stable in occupying your home address and how long you’ve maintained it. It also gives them the security of knowing where to find you if you fail to make your payments.

Joint mortgages or other loans

This can work both ways — if you enter a joint mortgage or loan alongside somebody with a good credit rating then you will score higher by association to their financial good behaviour. However, if they are responsible for missing payments or have a poor financial record then this will apply to you too. You will inherit their high-risk status.

Show stability

If you can avoid changing jobs regularly or moving home then again this shows a stability in controlling your life and finances.

An unusual way to boost your appearance of stability is to install a landline telephone at your home address. It may seem irrelevant, even a little old fashioned to many, but lenders will see this as another stability factor when considering how you handle your finances.

What not to do

Don’t apply for a lot of credit cards and loans

You might simply be looking for the best deals or rates you can be accepted for but new credit applications account for 10% of your credit score. The more you apply for the more applications it will look like you’ve been denied, with the assumed reason will be some form of financial insecurity. This will lower your credit rating significantly.

Don’t miss payments on existing credit cards

If you want to boost your credit rating then making regular healthy payments is a good way to go about it. Buy certain items on your credit card that you know you can afford or would be buying anyway in order to show how well you can pay your debts on time and in full.

Don’t use too much credit

Depending on your income you will have an estimated credit limit. This is the amount of credit all lenders will see as a fair and reasonable amount that you can comfortably pay back given the cost of living. If you get too close to that amount too regularly a lender will consider any additional debt a high-risk case and be less likely to award you what you’re hoping for.

Don’t miss payments

This is the most important feature of your credit rating adding up to 35% of your total score. If you’re late or miss any payments then you are a high-risk. If you do miss a payment make sure you cover the cost as soon as you can and show your ability to cover your mistake. Inversely, making payments on time will increase your score. This is why setting up direct debits on your utilities and other regular payments is so important.

Don’t cancel cards

Cancelling healthy credit cards with a zero balance will shorten your credit history and reduce your total available credit. By doing so you’ll be using a larger percentage of your available credit over your existing credit facilities, which drives up your debt utilisation ratio. If they’re not costing you anything there is no harm in keeping hold of empty credit cards.

Don’t avoid credit

Having no way to show the lenders how you handle credit or loans doesn’t give them any way to see how you behave financially. Having never been in debt might look like you’re solvent and healthy but that isn’t going to help with your applications. It’s all about your credit history and if you have no credit history you’ve got nothing to trade with. Lenders want to see all the healthy ways you’ve borrowed money and repaid it with efficiency and measure. So use any credit lines you have available but make sure you use them in a sensible and positive manner.

James Jones

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