Knowledge is power when it comes to getting credit
With many people looking to consolidate their debts or take out new loans or credit cards moneysupermarket.com urges borrowers to take time to understand their credit file in order to make it work in their favour.
Understanding your credit file will be vitally important come February when the European-wide Consumer Credit Directive comes into force. Although the changes are designed to bring the UK in line with the rest of Europe and provide consumers with greater transparency and greater protection on transactions, they will also result in more people being offered a different rate to the one they applied for. Currently two thirds of successful applicants must receive the advertised rate but from 1st February this will fall to just 51 per cent.
In addition, if a lender rejects an application because of the information held on the customers' credit file, it must inform them of this and tell them which credit reference agency was used. Brits therefore need to have a clear picture of their own credit report before applying to maximise their chances of being accepted.
Tim Moss, head of loans and debt at moneysupermarket.com, said: "With three million people expected to apply for a personal loan in 2011, it is vitally important to understand your credit file before you apply. Otherwise you may find yourself being rejected, or accepted but offered a rate higher than you expected. Under the current rules, for every 100 people who apply for a loan in the UK, only 30 are accepted, and of those only 20 receive the rate advertised. From 1st February this will fall to just 15 people.
"It is therefore beneficial to understand what lenders are looking for before you apply in order to avoid disappointment and a potential black mark on your credit file."
Tim's ten top tips for consumers looking to improve their credit score.
1. Check it
It's important to understand your credit profile and companies like Experian and Equifax can provide you with a report for a small fee. If you find an error, contact the credit reference agency immediately and ask for it to be corrected, as even minor inaccuracies could count against you when a company uses your credit report to make a lending decision.
2. Pay on time, every time
Always ensure you make payments on time even if it's just the minimum amount - missed or late payments can have a negative impact on your credit score. If you think you're unable to make a payment, contact your lender as soon as possible. Paying by direct debit helps as it ensures you will never be late making a payment and lenders like it as they know they will receive money from you every month.
3. Close unused cards
Close credit card accounts you are no longer using. Holding several cards can have an adverse effect because lenders look at the total amount of credit available to you, regardless of whether or not you use it. If you already have a number of cards, you may find you are offered a lower limit than you were hoping for and you could even have your application rejected. It is generally acknowledged that three credit cards, each with a different benefit, is an ideal number.
4. Stick to your limit
Stay below your credit limit as maxing out your card can be taken as a sign of financial stress. Not skating too close to the edge also eliminates the chance of you being charged for exceeding your limit and losing any introductory offers you might be on.
5. Get on the Electoral Roll
Make sure you're registered to vote. If you're not registered on the Electoral Roll at your current address, your application will be declined - even if your credit record is more spotless than George Osborne's.
6. Ensure you have a credit history
Providers assess potential customers on their previous behaviour, which can be frustrating for those without a credit history to secure credit. The trick is to build up your history slowly. Ensure you have a bank account and pay your bills on time as this will help to show that you can manage your finances and are a good candidate for credit.
7. Stay mobile
If you use a mobile phone then having it on contract and paying it in full and on time will provide a big boost to your credit profile. Just make sure you set up a direct debit so you never miss a payment.
8. Honesty is always the best policy
Always complete applications for credit accurately and honestly, lenders will be able to discover lies or half-truths easily and decline your application.
9. Ready, aim, fire
Don't use a scattergun approach when applying for credit. Multiple applications to several lenders within a short period will show up on your credit profile and may lead to some lenders refusing you credit.
10. Be smart
moneysupermarket.com has a credit profiling tool that helps people search and apply for the most suitable credit card for their personal circumstances. Anyone identified as high risk will be guided towards a set of products that offer them the greatest chance of being accepted.