A credit rating, also known as a credit score, is used by lenders to assess borrowers’ suitability for borrowing from them.
Credit Ratings Explained
A credit rating is a measure used by lenders such as banks, building societies, payday loan companies and peer to peer lenders to help judge whether a person or institution wishing to borrow from them should be lent money. In addition, the potential borrower’s credit rating helps the lender decide on the amount of money that could be lent, and the interest rate at which the money is lent.
When a consumer makes a request for credit (including loans, mortgages, overdrafts, credit cards, store cards, and payday loans), the potential lender contacts one or more credit agencies to obtain a credit rating check. The credit rating returned is an attempt to accurately assess the borrower’s credit history, including details of both past debt successfully repaid and details of any defaults. The rating reported by each credit agency is then considered, alongside the bank’s lending policies, to decide whether to lend, how much to lend, and a which interest rate to lend at.
Consequences of a Bad Credit History
Possessing a bad credit rating – which could involve missed loan, mortgage or credit card payments, defaults on credit previously taken out, or even a record of debt management solutions such as Debt Relief Orders, Individual Voluntary Arrangements or bankruptcy – has serious consequences for anyone wishing to borrow money. Obtaining credit will be more difficult, the amount of any credit obtained will generally be less, and interest rates and charges for any credit obtained will generally be higher. Given this, it is essential that anyone wishing to borrow money, especially large amounts, does all they can to cancel out any adverse credit history they may have; doing so will make borrowing both cheaper and easier.
How to Improve a Credit Rating
The best way to get competitive loans, mortgages or credit cards is to have a good credit rating; though it is difficult to quickly improve, credit rating repair is possible through good financial conduct over a sustained period.
The first step is to find the present state of the borrower’s credit rating. Many credit agencies will allow borrowers to sign up to find their credit rating, with a free credit check often available as an introductory offer; indeed, they often run ‘check your credit rating’ campaigns advertising such deals. Once a consumer has performed their credit history check, they will have an idea of the action to take to improve their rating. If their credit rating is fair, then they will simply have to keep making payments on any consumer credit products they already have, or apply for new credit which will allow them to demonstrate reliability by continuing to make regular payments.
If the borrower has a very bad credit rating, then they may have to apply for special bad credit loans or credit cards for bad credit. Though these products have high interest rates and charges, they enable those with a bad credit rating to improve their score if they continue making payments, thus giving access to more competitive credit products in the future.
Further advice on improving credit ratings, and general advice on debt management, can be obtained from a number of charities working in this area.