A subprime credit history has far-reaching effects. It will reflect on your ability to qualify for attractive deals down the track. Applying for a mortgage and a car loan will especially be challenging with a less-than-perfect credit score.
Your credit report consists of details of how much debt you owe, the types of credit you owe, and your repayment behaviour. Approval from a lender for a loan is obtained only when your credit file shows you in a good light.
While various lenders are out there who accept applications from subprime borrowers, they charge exorbitant interest rates. To get qualified for lower interest rates, you will need to ameliorate your credit rating.
Ways to do up your credit score
Here is a course of action to be taken to ameliorate your credit rating:
Identify why your credit score is poor
Credit reference agencies enable people to access their credit reports free of cost once a year. They may consist of some errors, such as unidentified accounts in case of identity theft and unaccounted payments, which can severely drop your credit points.
There are three types of credit bureaus that maintain your debt records: Experian, Equifax and TransUnion. Lenders might fetch your credit information from any credit reference agency, and therefore, you should check your score with all of them.
Upon finding any unidentified account or misinformation, ask the credit bureau to have it corrected. They may take a few weeks to act on your request. However, this is one possibility that lowers your credit points.
Other reasons include:
Missed payments
A high credit utilization ratio
Multiple credit applications
Defaults
Peruse your credit report and figure out the exact cause of your compromised credit rating. Not until you know the real cause will you be able to ameliorate it.
Take steps to improve your credit score
Once you have figured out the reason for an impaired credit rating, you should start taking steps in that direction.
If your credit score is extremely poor
Borrowers with extremely poor credit scores struggle to qualify for larger loans such as mortgages and auto loans. Personal loans also become challenging to get approved for. Bad credit loans in the UK, only for small emergencies, might be accepted, but interest rates will be quite high.
To fix this issue, you should take out a credit builder loan. These loans will require you to repay the debt over six months. By keeping up with payments on time, your credit score will start to go up.
If your credit rating is bad because of a high credit utilization ratio
A high credit utilization ratio suggests that you highly rely on credit cards for your payments and fail to pay the bills on time. Lenders will call your credibility into question. Ideally, it should not be more than 30%. Try keeping it as low as possible.
Settle credit card bills without delay. With debts across multiple credit cards, try applying for a 0% balance transfer card. No interest needs to be paid if you settle the whole balance within the interest-free period.
Talk to your creditors if this is not an option for you. They might let you settle the debt by making minimum monthly payments. Pay more than the minimum payment to get rid of the debt sooner.
If your credit score is abysmal because of defaults and late payments
Credit inquiries and late payments are documented to credit bureaus, and their impact on your credit report keep reflecting until two years and six years. It means they will continue to affect your credit rating unless they are removed from your credit file. You can do nothing once they have been recorded on your credit file. After two or six years, they will automatically disappear.
You should take a break from loans. Sometimes, nothing is better than doing nothing. After a couple of years, when inquiries and defaults become old, lenders will be less concerned about them. Some lenders like bargain loans will approbate your application if you demonstrate your repayment capacity.
Once hard inquiries and defaults disappear from your credit file, you should use a credit builder loan. Make small purchases through a credit card and discharge the whole balance on time.
Other steps to improve your credit score, irrespective of your credit profile:
Do not close your unused credit cards, as this will raise your credit utilization ratio.
Avoid opening a joint account with someone whose credit score is not up to scratch.
Make sure you are registered to cast your vote.
Do not act as a guarantor for someone’s credit.
It will take some years to be able to have a better credit score.
Avoid overdrafts and cash advances
Overdrafts are very expensive. They charge high interest rates. Lenders see it as a sign of poor money management. Overdrafts increase the credit utilization ratio and the debt-to-income ratio, which can lead to financial trouble for you.
Likewise, a cash advance, which means withdrawing money on your credit card, is also exorbitant. Interest rates are charged immediately as they do not offer a grace period. They also call your credibility into question. No lender would want to see that you keep relying on credit most of the time.
Stay away from payday loans
Payday loans can throw you into an abyss of debt. You should consider alternatives during emergencies. Too many payday loans on your credit file will reduce your chances of getting approval for mortgages.
The bottom line
Once your credit score has been ruined, it will take years to improve it. Make sure that you identify the cause and take steps to fix it. Do not forget that lenders will peruse your overall credit profile. Just on-time payments are not enough to ameliorate your credit score. You will have to focus on the credit utilisation ratio and the debt-to-income ratio as well.
Talk to a deb advisor if it seems overwhelming.
