As part of our ongoing Debt Tamers series, we talk about how you can be a good egg when it comes to borrowing money so you can get on the right side of lenders (and not let them screw you over!)
Does anyone else remember a scene from one of the greatest movie musicals ever – Willy Wonka and the Chocolate Factory – when Veruca Salt throws an almighty strop in the Golden Egg Room, trashes it, ruins the Oompa Loompas’ work (how could she?!) and then falls down a chute, presumably to meet her maker?
As one of my favourite films of childhood, I was mesmerised by Gene Wilder’s irreverent performance as Willy Wonka, the delightfully twisted creation of Roald Dahl, but was particularly tickled when he told Miss Salt’s father that she was disposed of because she was a “bad egg” and was therefore destined for the garbage, which in turn would end up in the furnace…
What can I say? I was a dark child!
I was reminded of this when writing my book Spare Change because I wanted to encapsulate how lenders regard us when it comes to dishing out loans. And to be honest, their character assessment is almost as brutal as Willy Wonka’s – you tend to be viewed either as a “good” or “bad” egg when it comes to credit.
In fact, seeing adverts on the London underground for a credit scoring service recently even reminds me of Willy Wonka’s scales for weighing up his eggs – apparently, the average Londoner hovers around the middle, thus on the precipice of either going onto greater things or tumbling down into the metaphorical financial furnace, should they put a step wrong.
I have long had reservations about how our credit scoring system works for consumers. It’s prone to error, it’s pretty much in the hands of private companies and many people have been deluded into thinking they have to pay to “maintain” a good credit rating, although we are now starting to see free credit checking coming to the fore. Not before time, I say.
To say that a good credit score is essential to our financial health, it seems wrong that so many young people don’t even REALISE that they have to keep an eye on it, tick certain boxes and avoid the pitfalls which can be incredibly damaging to their credit score, yet are worryingly common.
With that in mind, I thought it was high time to discuss the scourge of credit crapness and how we can best avoid it as part of our ongoing Debt Tamers series. It doesn’t take as much effort as you might think to get back in control and the rewards are well worth it. You’ll give yourself the best chance of accessing “good” credit when you need it further down the line and it might even help you sleep a bit more soundly in the wee hours.
So here is how you can become a “good” egg (at least when it comes to your finances…when it comes to everything else, you’re on your own, kiddo!)
1. REQUEST YOUR FILE
If you have been refused credit, the lender is legally obliged to tell you why. That is down to that rather lovely piece of legislation called the Data Protection Act. You can find out which of the credit reference agencies the lender has used to run the rule over you. Then you should apply to that agency for sight of your current credit file and remember – you have a legal right to do that, for free or a small nominal fee. There are three main bureaus – Equifax, Experian and Callcredit – as well as third-party agencies that use their data.
2. CHECK YOUR FILE
Getting hold of your credit file won’t actually show you a credit score – that is decided by each lender according to their own secret formulas. But it will show you your history of managing credit and bank accounts, paying bills, and repaying loans. There could be a mistake in there, which might have been critical in the lender’s decision. If there is, tell the agency immediately. You can ask for a note to be put on the file. All credit applications will stay on the file for a year, black marks against you for six years.
3. BE ALERT FOR FRAUD
If there is any entry in your file that you don’t understand, it could have been someone else trying to open an account in your name. Look out for unfamiliar or suspicious entries, such as a credit application you didn’t make, a sudden bulge in your debt, an account that you don’t remember opening. These are the tell-tale signs of the plague of identity fraud, and you should contact the relevant lender straight away. They may want to see evidence that it really wasn’t you operating that account.
4. GET YOUR PAYMENTS IN ORDER
If you have made any late payments, or missed them altogether, on any of your accounts or household bills, including your mobile phone contract for instance, your credit file will find you out. Use it as a wake-up call. Whoever thought paying bills could be a positive? But getting into the habit of keeping a tight budget and paying as much as you can by direct debit will soon start to work in your favour. Other little financial titbits to bear in mind; you must keep your overdraft within the agreed limit, and your credit card repayments on time and at the minimum level (but ideally, at the absolute maximum level you can manage, as minimum repayments stretch out the cost of borrowing for donkeys years and make the whole shebang way more expensive). To improve your score, try and do a bit better than the bare minimum – lenders will want to see how much of your credit you can REALLY manage and you want to be saying “all of it!”
5. STRENGTHEN YOUR PERSONAL PROFILE
Do you vote in elections? No judgin’ – maybe you’re the Russell Brand kind – although I personally think you can’t hope to change things if you don’t take part in democracy (however flawed it might be). But even if you disagree with that point of view, you should be on the electoral roll. Why? For potential lenders, this confirms your name against a fixed address. It seems silly but believe it or not, it does make a difference to how “reliable” you’re seen as a borrower. If you cannot vote, because you are a foreign national for instance, you can reassure a potential lender by sending the credit reference agencies proof of your residency and asking them to attach a note to your file to verify this. Lenders also like to see a landline phone number (old school!) To improve your score, you should ideally send evidence of settled periods at the same address, and in employment, with increases in your pay (if you’ve had any…*rolls eyes*)
6. LOOSEN UNHELPFUL TIES
If you are in a relationship and have any sort of joint account, your partner’s financial history will be connected to yours. If that comes as ghastly news to you, you might want to sit down before Valentines Day and have a wee chat with your beloved about whether they’ve ever received any visits at the door from a big burly chap called Phil who’s come to take their TV away.
Don’t get me wrong – having joint finances can be helpful in some cares. If you have a current account or apply for a joint mortgage, it may open up different rates to you. But it does mean that if your other half becomes your ex, their credit history will still be tied to yours, and that could be unhelpful. Any joint accounts with friends or partners will continue to impact your score and ability to obtain credit, until they are properly separated. You will also need to tell the credit agencies when your circumstances have changed.
7. TIDY UP YOUR ACCOUNTS
If you have any old credit cards, store cards, or accounts that you don’t use or need anymore, shut their butts down (as Quentin Tarantino is fond of saying). Potential lenders will not know whether or not you intend to use them in future, and the amount of theoretical credit you have on these accounts will be totted up and could prevent you from being granted any fresh credit. Cutting up cards is not enough (although admittedly cathartic when it belongs to a cheating ex…so I’ve been told, of course)
You must contact the lender and tell them if that bit of credit belongs to the past. Yes, it might seem like a bit of hassle, but so is having a lot of dead credit on your file, dragging you down.
8. SPACE OUT YOUR APPLICATIONS
The scattergun approach will count against you. Unlike shopping around for quotes on a purchase, every time you make a loan application it shows up your file. Lenders don’t like to see a rash of entries in a short space of time, because it looks as though you are a bit desperado for credit. So if you need to keep trying, space out your applications. Take a breather, maybe go on a meditation retreat for a few weeks and cleanse your karmic energy with a Buddhist monk.
Whatever you do, just have a break, then try again. Do not apply for any product unless it appears to be exactly what you need at that time and, ideally, find out first whether you are likely to be accepted. You can do this with a lovely “soft” search as opposed to a big nasty “hard” search. What the heck is the difference? Read on…
9. SMART SEARCHING
Now you have taken all the right steps to improve your credit score, it’s time to peek under the rock and find out whether it’s working. Like I said, you should be using websites or providers which offer a ‘soft’ or ‘smart’ search to give a provisional yes or no on whether you would qualify for a particular product. A yes cannot guarantee that you will get through, but a no is a clear warning that you are not quite there yet. Either way, the inquiry does not show up as an application for credit in the way that a formal or ‘hard’ search does.
10. CONSIDER A CREDIT-BUILDER
One way to start moving your score in the right direction is to apply for a credit-builder card. These are the cards that advertise what looks like a sky-high interest rate, but encourage those with a poor credit history to apply. If that’s you (admit it!) these cards could be a good place to start. The trick is to use the card to show that you can stay within a limit and make the minimum payments on time. The better your record on repaying even small amounts of credit, the more likely you are to improve your credit score. It is very important that you are confident you can manage these cards though (so no false displays of financial virility that you can’t actually keep up). Don’t apply without taking time to get yourself organised first – they have a nasty bite if you misjudge a payment.