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Why do I have poor credit?
If you’re struggling to take out credit, or just curious to know what your score is, you may have been online to check.
So if you’ve found that the credit rating you’re given is poor, it will probably leave you wondering why.
In this blog, we explain some of the reasons your credit rating could be less than perfect, and give you some tips on ways to improve it.
Have you relied on credit?
If you’ve taken out and used lots of credit in the past – so loans, credit cards, overdrafts etc. - you may find yourself with poor credit. But why?
Well, relying on credit can show a lack of financial independence – you’ve needed to borrow to fund your lifestyle.
But it’s not just about the credit you’ve taken out – it’s also the way in which you have behaved when repaying that credit that has an impact.
So, if you’ve stuck to the repayment terms the lender set out – such as making your payments on time -, your credit score will be better than if you have struggled to keep up with repayments.
For example, if you’ve missed payments (particularly mortgage payments), then you are likely to find yourself with poor credit because you’ve broken a promise to your lenders.
You said you’d repay certain amounts on certain dates and then – for whatever reason – you’ve not been able to. Unfortunately, future lenders could see you as an untrustworthy borrower.
But I’ve never taken out credit
So if you’ve taken out lots of credit, or struggled to repay the debt you’ve taken out, you might find yourself with a poor credit score. What’s the deal if you haven’t ever borrowed?
Well, you might think that because you’ve never taken out credit, your credit history will be perfect. Unfortunately not.
In many ways, borrowing is a game of trust and this goes back to how lenders view you. So if you’ve never taken out credit before, you haven’t been able to prove to lenders that you are a reliable and trustworthy borrower. You have no proven track record.
While it’s true that you may be financially independent and have never had a need to take out credit before, your credit history can end up being negatively impacted because of it.
That’s not to say that your credit score is necessarily ‘bad’, just that it is fairly non-existent. To improve it, you’re going to have to start building it.
How do I improve my credit?
It might sound easier than it is in practice but you’d need to show lenders that you are a responsible borrower – either by being less reliant on credit, or by keeping up with repayments.
Remember that debts remain on your credit history six years – so if you manage to keep up to date on repayments for that period, you may be able to look at applying for other credit after (or near the end) of those six years, once your credit history has had time to repair itself.
If, as mentioned above, you’ve never had a need to take out any credit, you could look at borrowing as a means of building your credit rating.
Even if you don’t need it, you can help build a credit history because you can show lenders exactly that – you don’t rely on it. So for example, you could take out a credit card, use it to buy things you’d normally use your debit card for and then clear it at the end of the month.
You’re showing you’ve got access to credit and that you can use it in a controlled way. This can work as a way of building a credit history from nothing.
Don’t forget, you can check your credit history for free and see it improve as time goes on.