Credit ratings can have a surprising impact on our everyday life. From making it hard to rent a home to causing us issues when applying for a new job, a bad credit rating takes time and effort to fix. But what causes a bad credit rating in the first place?
Causes of a Bad Credit Rating
A credit rating is an assessment of someone’s ability to repay debts. Lenders use credit ratings to decide whether or not to offer loans and credit cards, and what interest rate to charge. A bad credit rating makes it harder to get credit or leads to higher interest rates.
There are several potential causes of a poor credit rating:
- Missing payments – If you miss or are late on payments like credit card bills, utility bills, or loan repayments, it damages your credit score. Even one missed payment can harm your rating.
- Defaulting on loans – If you completely fail to repay a loan or credit agreement, it is likely to severely damage your credit score. Defaults stay on your credit file for 6 years.
- Too many credit applications – Applying for a lot of credit over a short period can suggest you are desperate for credit and make lenders less inclined to approve you. Too many applications will lower your score.
- Errors on your credit file – Sometimes there can be incorrect or fraudulent information added to your credit file, such as accounts you don’t recognise. This can unfairly drag down your rating.
- Lack of credit history – If you have no experience of borrowing and repaying debts, you won’t have a credit history for lenders to assess. This can make it harder to get credit.
How to Fix a Bad Credit Score
If you have a poor credit rating, there are steps you can take to try and improve it:
- Check your credit reports – Make sure there are no errors dragging down your score unnecessarily. You can check your reports for free. If there are errors, you can apply to the credit agencies to get them corrected.
- Pay all bills on time – Setting up direct debits and standing orders helps ensure you never miss payments. Even being a few days late can damage your rating, so pay on time every time.
- Pay down debts – Aim to get balances on credit cards and loans down, as lenders look more favourably on lower balances. Pay off the most expensive debts first.
- Limit new applications – Avoid applying for new credit as multiple applications make you seem desperate. Wait 6-12 months after improving your rating before applying for new credit.
- Borrow responsibly – Showing you can handle debt will go a long way to rebuilding your credit. Borrowing responsibly when needed, such as applying for poor credit car finance, proves to lenders you are making an effort to fix things.
Ask for Help if Debt is Dragging You Down
Seek professional debt help if needed – If debts are unaffordable, consider approaches like debt management plans. Non-profit debt counselling services can also advise on repairing credit ratings.
With time, patience and dedication, it is possible to rebuild your credit score after a setback. But be aware it takes consistent effort over months or years to fully restore a damaged credit rating.
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