You may have heard the terms ‘credit rating’, ‘bad credit’ and ‘credit history’ any number of times before, but what exactly do they refer to and more importantly, how do they affect you?
Credit rating
There is no such thing as a universal credit rating – as each lender has its own scoring system – but companies that lend money (such as banks, building societies etc) look at your history of repaying any credit that you have borrowed. If you have always repaid debts on time and never gone over an arranged overdraft or credit limit, then your score will be quite good. If you have repaid debts quickly, your score may be improved further, as you will have demonstrated to the lender that you are a low risk of failing to repay their money back to them.
In simple terms, “bad credit” refers to a borrower who has failed to repay debts, loans and credit cards in the past, or who may have demonstrated one or more of these practices in the past:
- Late or skipped payments
- Going over credit card limitations
- Declaring bankruptcy
All of these can give a person a bad credit history – indicative of poor financial management – which calculates to a poor credit rating.
Why is credit rating important?
A bad credit rating can affect your finances, your home and ultimately, your future. A lot of people aren’t aware of their credit history until they try to take out a loan or apply for a mortgage, at which point they find that lenders and banks take one look at their credit rating and refuse to approve the loan. This is a matter of trust, as they believe applicants with a poor credit rating are likely to be a financial risk to their company. Some lenders may decide to offer an extremely high rate of interest as a compromise, rather than refusing credit altogether. This is quite contradictory in terms, as the fact that the person may have had difficulties in the past may be further deteriorated by having to repay a higher rate of interest!
The way out of bad credit
The first thing you need to do is find out your credit rating from a credit bureau (such as Experian or Equifax) checking that there has been no errors. You then need to start paying off your debts, starting with those with the highest interest first, always making sure that you meet your payments on time and don’t spend over your allocated limit.
If you find you can’t pay your debts or are overwhelmed by the process, you may need to seek some further debt advice as a way of relieving the problem of repaying debts and to start sorting through the financial confusion.