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IF you are already in debt your main priority should first be to repay your debt – or at least get your repayments under control.
If you are currently in debt, you should:
- Follow the four steps of debt control: [See: www.adviceguide.org.uk]
- Make a list of your debts
- Work out your budget
- Sort out your priority debts
- Sort out your non-priority debts
- Always repay at least the minimum amount required by your creditors each month – failing to do this will only result in default charges, increased repayments and damage to your credit score.
- Go through your finances and make cutbacks in order to increase the amount you are able to repay on your debts.
- Consider consolidating your debts with a loan in order to reduce the interest charged on your debt – this will allow you to either more manageably meet your repayments, or be able to knock more off your debt each month.
- Seek professional assistance from a debt counselling or debt management agency. [See: www.nationaldebtline.co.uk or www.cccs.co.uk]
- Contact your creditors to try and come to an informal arrangement with regards to reduced repayments until you can afford to increase the repayments again or until the debt is cleared.
Only once you have your finances under control – or even your debts repaid - should you consider using credit to improve your credit rating.
However, there are still a number of ways in which you can improve your credit rating without applying for – or needing to use – more credit.
You can start to improve your credit rating by:
- Keeping on top of bills and repayments – always paying your bills and credit repayments on time can help to improve your credit score.
- Remember, all bills are important – paying your council tax, utility and service provider bills on time will help to keep your credit record clean and your credit rating healthy.
- Get on the electoral roll – if you aren’t already register to vote, getting your name and address on the electoral roll can be vital to having a good credit rating. [See: www.aboutmyvote.co.uk]
- Check your credit score - you may know it's poor, but finding out exactly what is on your credit record can be very useful. [See: Experian
 or Equifax] - You may find mistakes – that can be easily rectified and will help to improve your credit rating.
- You can see exactly what the banks see when you apply for credit – you’ll also be able to see the reasons why if you have had a credit application turned down.
- Pay your salary into your current bank account.
- It may sound silly, but banks like to see that you’re earning money – cashing salary cheques instead of paying them into your bank account will make it look like you’re not earning any money.
Dealing with your debts is important
The last thing that you should do if you have a high level of debt is bury your head in the sand, as this will make your problems far worse because you won’t be addressing your debt.
Mismanagement of debts can quickly lead to bad credit, and this is something that you need to avoid.
Even if you have already knocked your credit rating down, you need to get a grip on your debts in order to get them repaid and start improving your credit score again.
Can you consolidate?
For those that have high levels of debt but a fairly decent credit history consolidation loans are an option.
Debt consolidation loans are available to those with poor credit on a secured basis from many lenders, so bad credit customers will usually need to be homeowners.
Consolidating your debts can reduce the amount that you need to repay each month so that you are not struggling financially. Alternatively, if you can comfortably meet your current repayments – an overall lower rate of interest on your debt will mean you are able to repay more of the principal balance each month and clear your debt quicker.
Re-budget your income...
You may want to simply go through your budget and expenditure to see whether you can make any cutbacks on luxuries, and the freed-up funds can then be applied to your debts.
The faster you are able to clear your debt the less interest you will have to pay overall – and the sooner you’ll be able to start rebuilding your credit score again.
Don't be afraid of asking for help...
In many cases it may be that there are no cutbacks that can be made. In these cases, it is nevertheless important to keep on top of required repayments to bring your debts down and not to let them spiral out of control.
You can look at contacting your creditors in order to see if they will accept reduced repayments for a period of time, which can help to reduce the chances of missing payments on your loans and credit cards.
Many creditors can be flexible – they are more likely to accept a smaller payment than risk not getting repaid at all.
If your debt problem is severe then you may need to consult with a credit counselling or debt management agency, who can determine the best route for your needs and circumstances, and can put a plan together to try and get you out of debt without overstretching your budget.
Remember, there is help available to you and getting in touch with your creditors or a counselling or debt management agency could help to see you back on a steady financial road.
When you debt is under control...
When your debt is firmly back under control – or when you’ve repaid your debt in full - you can start to look at making use of credit to help to rebuild and improve your credit rating.
Bad credit rating credit cards offer one way of using credit to rebuild your credit score.
Remember, bad credit rating credit cards are aimed at people with a less than perfect credit score, and as unsecured lending they often charge pretty extortionate rates of interest.
The last thing you want to do with a bad credit rating credit card is to let a spending-spree roll-over to next month – the rates can be in the 30%’s, and one missed payment could see you getting back into debt again.
However, used carefully these cards really can improve your credit score. Just remember to always repay your balance in full and on time each month to improve your credit score and avoid any interest charges.
When rebuilding or strengthening your credit score keep track of your credit report periodically – not only will you be able to see the fruits of your labour, but you’ll also be able to quickly spot any mistakes or potential old bad-credit-behaviour to avoid slipping into.
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