How To Avoid The Credit Crunch

The credit crunch has made life difficult for millions of consumers and getting credit can be tough. So what do you need to know in order to get that loan, credit card or car finance agreement? With the help of www.debts.org, we explain how credit reference agencies work, what causes poor credit ratings and how you can improve your credit score.

What is a credit score?

A credit score is what lenders use to evaluate how likely you are to repay a loan. In short, a credit score determines the risk you pose to the lender and whether you can be trusted with credit.

Whenever you apply for any kind of loan, credit card or car finance agreement, the lender will contact a credit reference agency for your credit report. The credit report is held by reference agencies such as Experian or Equifax - who compile information received from any previous lenders. If you have dirty washing chances are lenders will air it in front of credit agencies.

How are credit scores calculated?

Each lender has its own formula for calculating credit scores based on information received from credit reference agencies. It is not uncommon for one lender to reject a loan application while another may happily hand you the cash.

Credit scores are based on personal information, including:

·          Marital status

·          Age

·          Job

·          Dependents

·          Purpose of Loan

The credit report held by credit reference agencies will hold all your credit history - the good, the bad and the ugly. A history of missed payments on loans or credit cards will greatly damage your credit rating. Additionally, any unpaid debts will not bode well with lenders and will significantly increase your risk potential.

You are more likely to receive credit if you already have it and can demonstrate an ability to manage payments. Your income will also be important - a low salary may suggest you don't have adequate resources to meet repayments.

How can I improve my credit rating?

In the first instance you should request a copy of your credit report from the two larges reference agencies - Experian and Equifax. Check it for inaccurate entries, such as loans you never applied for or County Court Judgements never served. Contact the reference agency to have these removed as soon as possible.

If there are entries which you believe you can justify, try writing to the agency explaining your reasons for breaching the agreement. They will not remove the entry but can insert a note of explanation.

There are some ugly marks that you can do little about. Bankruptcy or IVAs will be a permanent feature on your credit report until the full term has been completed. Learn more about consequences of bankruptcy and IVAs at www.debts.org/bankruptcy and www.debts.org/iva

Finally, get some form of credit. Having credit is the best way to reduce your lending risk potential. Try using a credit card regularly but in amounts you can afford to repay. Having no credit will not create the kind of positive history lenders like to see.

For more ways in which you can improve your credit score, visit www.debts.org/credit_reports

Is getting a loan impossible with bad credit?

Although the credit crunch has made borrowing more difficult - there are still options available to people with bad credit scores.

There are many lenders who specialise in offering loans to people with bad credit. However, people with County Court Judgements or a history of defaults will not have access to competitive interest rates. Bad credit loans always have the highest interest rates to reflect your risk potential.

Shop around for bad credit loans at www.debts.org/loans

Is getting a mortgage impossible with bad credit?

Mortgages have become increasingly difficult for everyone, especially for first time buyers and people with bad credit. There are, however, mortgage plans still available for people with bad credit history. If you have a poor credit rating you may have to pay higher interest rates and find a substantial deposit (15% of house value).

Shop around for bad credit mortgages at www.debts.org/mortgages

FAQs on Credit Scoring

1 - Can other people I share a house with affect my credit rating?

People you live with will have neither a negative or positive affect your credit rating. If you have a joint mortgage or bank account, however, that person's financial history will be taken into consideration by credit reference agencies.

2 - Can former occupants cause bad credit scores?

No. Lenders are only interested in you and not the people how formerly lived at your address.

3 - How many credit scores does each person have?

Every lender will calculate credit scores differently so it is always liable to change. The criteria they base your score on it partly to do with your history record - provided by reference agencies - as well as your job, age, number of dependants etc.

4 - Are old debts held on record?

Previous misdemeanours, such as missed payments are kept on record for 3 years.  Bankruptcy and IVAs, however, are on record for periods of 6 years or until the term has been completed.

  5 - Do the likes of Equifax decide my credit score?

No. Credit reference agencies keep a record of your financial history from which lenders calculate your credit score.

6 - Could I be on a  'blacklist'

No, there is no blacklist. If you are having trouble obtaining credit, it will be because you have missed payments, unpaid debts, CCJs, Bankruptcy or IVAs on your credit record.

For more information on credit reports visit www.debts.org/credit%20_reports