Image: Fiona Hanson - PA
Five years ago, most people's attitude to their credit status was: "It must be OK - I'm always being offered cards and loans."
Today, things couldn't be more different. Banks facing the combined effects of the credit crunch and recession have tightened their lending criteria to such an extent that only those with the cleanest credit reports qualify for credit.
"You may know that a clean credit report is important, but very few of us have the first idea that we could inadvertently be trashing our credit status," said Darryl Bowman, director of the credit monitoring service CreditExpert.
Here are some surprising ways that you can damage your credit rating - and what to do about them.
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Not knowing what affects your credit status
Lenders use a wide range of data when they decide whether or not to make you an offer.
Information such as your earnings and how many people you support comes from your application. They then turn to your credit report to assess whether you are stable and a reliable borrower.
It lists your credit, such as cards, loans and your mortgage, along with your repayment record. You should ensure that it's up to date and accurately reflects your circumstances.
Look for:
- Minor clerical errors, such as an outstanding balance you know you paid.
- Inconsistencies in the way your address is listed - for example, Basement Flat, Flat B and Flat 4.
- Applications and accounts you don't recognise.
If you find anything you disagree with, take it up with the relevant lender and ask for it to be corrected - be ready to provide proof.
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Moving home
When moving home, there are numerous dangers for your credit record.
To avoid these pitfalls, remember to:
- Make any big credit applications before you move. Lenders prefer you to have lived at the address you give for at least three years and you could lose valuable points from your credit score if you leave things until after you've settled in your new home.
- Cancel gas, electricity, phone and cable contracts in writing, at the same time that you tell your bank, building society and other key organisations that you've moved. If you forget, the people who move in could run up bills in your name. A single missed payment stays on your credit report for at least three years, while a court judgement will blight your credit rating for six years.
- Redirect your post via the Royal Mail for at least a year. If your mail continues to go to your old address and is intercepted, the newcomers could use it to hijack your ID, open new accounts in your name and leave unpaid bills.
Forgetting to divorce your finances when you split
Every time you apply for or take out a joint credit account, such as a mortgage or even a mobile phone contract, you create what's known as a financial association.
These are listed in your credit report and lenders may check your financial associate's credit report when you make an application, because their circumstances can affect your ability to repay what you owe. So if your ex gets into money trouble, you could suffer.
Add to your break up to-do list:
- Agree who will take on what debt.
- Cancel old joint accounts and set up new, individual accounts.
- Tell the credit reference agencies immediately and ask for the financial association to be removed from your credit report.
Not registering to vote
Lenders check the electoral roll as a precaution against fraud, to see that you really live where you say you do.
So, even if you have no intention of voting, you should:
- Cancel any past registration, especially if it goes back some years and several home moves.
- Contact your local council or go online www.aboutmyvote.co.uk and register.
- Check that your new registration is shown on your credit report.
Having an emergency credit card
Lenders don't only take into account the amount you actually owe when they decide whether you should be given access to further credit. They look at the amount available for you to borrow.
Before you make an application:
- Go through your credit report and look for unused accounts.
- See if you can roll up several smaller outstanding amounts into a single account - for example, transfer the balances from several cards onto a single card.
- Pay off and close down any accounts you no longer need or rarely use.
Not having any credit accounts
You might think that lenders would love people who haven't borrowed a penny or have long since paid off what they owe and shut the accounts down.
In practice, this means that you don't have a recent track record that shows you are a reliable borrower, so you'll actually be penalised for your prudence.
Consider:
- Taking out a credit-building card, using it for everyday shopping and repaying the total, in full, every month.
- Talking to your bank manager and getting a personal reference if you want a loan or find it difficult to qualify for a card.
- Thoroughly managing your account for at least a year, ensuring that repayments always arrive on time, so that you establish your credit credentials.
Making lots of applications in a few months
Never window shop for a new loan, card, mortgage or any other form of credit by making a full application: lenders will check your credit report each time and every check will leave a trace.
Other lenders may interpret these as a sign of desperation or even suspect a fraud is being planned.
Instead:
- Do your research in advance. Use personal finance websites, newspapers and price comparison sites to get a feel for the kind of deal you might get.
- Ask for a quotation search that will not leave a mark on your credit report that's visible to other lenders.
- Only put in an application when you're sure you've found a deal that is suitable and affordable.
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