It's a basic rule of money. Lenders who give loans to people with poor credit ratings are taking a greater risk that they won't get their money back.

If you have a history of being unable to keep up with loan repayments, most lenders won't touch you with a bargepole. And those who do will want a hefty reward for their ‘bravery', in the form of….you've guessed it, higher interest.

That's why those who have a poor credit rating have to resort to expensive ‘sub prime' finance if they want to borrow money. Being charged a high rate of interest is their punishment for having a poor credit rating.

But this rule also works the other way. The better your borrowing record the more attractive deals you'll be offered.

Better credit rating = Lower risk = Lower rate of interest = More money to destroy your debts

Now I don't want you to get the wrong impression about this. The advice that I am about to give you is not intended to allow you to borrow even more. Don't even think about it! That's why you're in this situation. That's why you are reading this website and looking for the magic answers to dig you out!

Instead, use these details to help blast your way out of debt by using your improved credit rating to refinance your debts at a lower rate of interest.

Right, here goes.

When you approach a lender to borrow money, most of them decide whether or not to accept your application by using a credit scoring system. They look at you personal details and give you points for certain things. If you get enough points they'll lend you the money. If you fall short of the required score, they'll tell you to go away. You should always bear in mind that nobody has a divine right to be granted credit.

Credit Scoring Points

Points will normally be scored according to your age, occupation, whether you are a home owner, the length of time at your current address, whether you have a phone, ownership of credit cards, your repayment record on previous loans and so on.

Lenders also look at the amount of your current debts compared to your income. If they feel that you don't have enough income to cope with the extra borrowing then your application will end in refusal.

In most countries, these details are collected and held by credit reference agencies. These companies build up information on you and everyone in the country. They store details on your financial position from the electoral roll, court judgements, repossession orders, bankruptcy details, payment records, previous credit applications etc.

Your credit record is one of the main factors that lenders use to decide whether or not to grant you a loan. If you've had trouble repaying debts in the past, then you're less likely to be given credit in the future. And even if you are, you'll be hit by extortionate levels of interest.

Correct Your Credit Record

If you're concerned that certain inaccurate details are tainting your credit record, then take the following steps.

If a lender turns down your credit application, write to that organisation and ask which credit reference agency they used to help them arrive at their decision. In most countries they're legally obliged to tell you. This letter should do the trick.

Dear Sir/Madam

I am writing with regard to the refusal of my recent loan/credit card application. Please provide me with the details of any credit reference agency that you approached for information about me.

Yours Sincerely

Once they reply, giving you the name of the credit reference agency that they used, the next step is to write to the relevant agency to get a copy of your credit record.

For a small fee you can request a copy of the information that they hold on record concerning you. Ask them for a copy of your Credit Report. Give your full name (including your maiden name if this is appropriate), any other names that you're known by, your date of birth, your full current address, any previous addresses that you've had in the past 6 years, and your signature.

If you run a business, give its name and address as well, because they may hold separate information on you under your business details.

Once your record arrives, check it carefully. If there are any inaccuracies then take the matter up with the relevant lender who turned you down. Send them a letter that covers all the details of your complaint, including the disputed information, copies of relevant documents that prove it is incorrect, your details and a brief note explaining why the information is incorrect.

If no progress is made with the relevant lender, then write to the credit reference agency that reported the inaccurate information, giving the same information that you originally sent to the lender. But first make sure that you have a copy of your credit report from that agency.

If any inaccurate information in your report is corrected, the other credit reference agencies should, in time, receive these details and correct their own files. But this could take some time.

But whatever you do, there is still no guarantee that it will allow you access to cheaper credit. So here are six steps that you can take to improve your credit rating.

1) An easy way to instantly improve your chances of getting cheaper credit is to make sure that your name appears on the electoral register. Credit firms will normally use the electoral roll to find out where each person lives. This is one of the main sources of information used by these credit reference agencies. If your name doesn't appear on it, lenders become suspicious.

2) If possible, only apply for credit that you think you'll be given. Every credit application that you make will be recorded on your file, so a string of refusals could deter other lenders.

If your regular debt repayments take up more than 36% of your monthly income, you're in danger of being refused credit. Either that or you'll be punished with a much higher rate of interest.

As a rough guide add up your total monthly income (after tax). Include all wages and any overtime, commissions or bonuses that are guaranteed. Then add any other forms of regular income such as interest or maintenance payments. If your monthly income varies then calculate the monthly average over the past two years (add all your income over the past two years and divide the answer by 24). Now add up your monthly debt repayments. Remember to include payments for credit cards (use the minimum monthly repayment figure), personal loans, overdrafts and mortgages. Finally, add any monthly rent that you pay.

Then divide your total monthly debt repayments by your net monthly income. The answer is your total debt-to-income ratio. If you had a monthly income of $1000 and monthly debt repayments of $250, your debt-to-income ratio would be 250/1000 = 0.25 or 25%.

As I say, the critical ratio is 0.36 or 36%. Keep below this and you are much more likely to be offered credit at reasonable rates of interest. The lower your ratio is the better deals that you'll be offered.

3) Don't apply for too much credit at the same time. Lenders become suspicious if they see a sudden avalanche of credit applications on your file. They may draw the conclusion that you're applying for it all at once so that you can honestly answer the ‘how many other loans/credit cards do you currently have?‘ type question, that appears on most credit applications.

4) Always pay your bills on time. Even paying the minimum, although it's not perfect, is much better than nothing. Payments that are more than 30 days late will have a negative effect on your credit rating.

5) Credit reference agencies tend to place more emphasis on bad reports (such as court debt judgements, credit application failures) than good reports (such as loans that have been paid off successfully). Negative details will remain on the files of the credit reference agencies for six years. So it's a good long term strategy to avoid bad reports and build up as many good reports to your name as possible.

6) Avoid all those ‘credit repair' companies that claim they can improve your credit record. They can….at a price! You know, the type you see advertising in the back of national newspapers, claiming that they can remove Debt Judgements or other court decrees that exist against you name.

What a load of rubbish! These companies can't do anything that you can't do yourself. So forget using a credit repair company. These shady characters are nothing more than a front for a lender or a broker trying to sell you a loan.

Here's the sketch: You pay them to ‘clean' your credit record. They apply their ‘powerful' methods and magically give you the ‘all clear'. But they've not actually removed anything from your record….because they can't. But you won't know that!

And then to prove your new ‘creditworthy' state they either offer you a loan or put you in contact with a company that's willing to lend to you.

If you accept, you'll have fallen into the realms of sub-prime finance, which means rip-off city.

Using the details that I have just provided, you can easily take steps to improve your credit record yourself. And in the process allow you to refinance your current debts to a much lower rate of interest.

by Stuart Laing

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