Why Would A Good, Responsible Person Have a Bad Credit Score?

You may not like it, but credit ratings loom large in our lives. Enjoying a good credit score means that you’ll have access to a larger number of options when it comes to mortgages, personal loans, credit cards and other financial products. Having a good score will also mean that you’ll be able to secure favourable interest rates and larger capital amounts than somebody with a bad credit rating.

You are more likely to have a good credit rating if you have behaved responsibly when it comes to running your financial affairs. That means paying your bills on time every month, never going into arrears on your mortgage, not going overdrawn at the bank and not maxing out your credit cards. But there are exceptions to every rule and credit ratings are no different – a lot of extremely responsible people find that they are unable to access favourable credit through no fault of their own. So, what are they doing wrong and what can be done to fix it:

Nobody should use credit to finance a lifestyle that they cannot afford and to many that means that they only ever have one credit card or none at all. Those that do, will religiously repay their entire balance each month so that they avoid interest charges altogether. While that may sound like good financial management, doing so may actually be harming your chances of obtaining credit, when you do decide to borrow. Lenders, as well as assessing your actual credit rating, also use a calculation based on the amount of available credit you have and what you are actually using. If you have a credit limit of £10,000 and your balance each month is £2,000 then your debt to credit ratio would be 20% that most lenders would deem to be too high. This would still be the case even if you paid that £2,000 off in full every month.

It’s widely accepted that banks and financial organisations like to see a debt to credit ratio of somewhere around 6%. So, it wouldn’t matter if you always paid your credit card bill in full every time – only having one credit card and putting thousands of pounds on it each month would make the banks view you as a poor credit prospect. The way to fix this is to increase the number of cards that you have and spread that monthly spend across all of them.

Most people like to secure the best deal and loans and credit cards are no different. The Internet has made searching and applying for a new card or loan extremely easy – the forms are relatively straightforward and you will usually get a decision in seconds. It may seem like a good idea to apply for lots of different cards or loans to ensure that you get the best deal but this can be a huge mistake. Every time that you apply for credit, you are allowing the financial organisation to perform a credit search on you. This is recorded on your credit report and lenders view a lot of credit searches on a report as an indication that somebody is experiencing financial difficulties when, in reality, the opposite may be true.

The more searches on your report, the worse your credit rating will be. You can avoid this by using the pre-application eligibility checks that many of lenders now offer.

If you’ve recently moved house you may not yet be on the electoral roll. No big deal, right? Wrong. If you want to apply for a new loan or credit card, one of the first things that a lender will look at is if you are on the electoral roll. If you are not, the lender might take this as an indication that you have had problems in the past and are trying to avoid repaying your debts by keeping your address hidden. Likewise if you move around a lot: lenders don’t like this as it suggests financial unreliability. Making sure that you are registered to vote at your new address can go a long way to alleviating these problems.

While only having a single credit card and using it a lot or not having any at all can affect your chances of obtaining more credit, having lots of cards which you never use can also affect your credit rating. That’s because lenders are wary of people who take out cards but then don’t use them for a simple reason – they are unlikely to make much profit from these account holders. While lenders like you to be responsible, they don’t want you to be so responsible that you end up costing them money. It’s a good idea to close some accounts if you are not using them and maintain just one or two for emergencies. These will be shown as closed and settled on your credit record, increasing your chances of being able to successfully get more credit when you need it in the future.

You might be a saint when it comes to your finances but if your partner, offspring or anybody who lives at the same address or is linked financially with you in some way is not, this might scupper your chances of obtaining credit. You can find out by obtaining your credit records and look at who is linked to you and then writing to the credit reference agencies and explaining where you are not linked financially. Make sure, too, that people who used to live at your address are no longer registered there.