Repairing a bad credit history

Debt doesn't have to ruin the rest of your life. A bad history can be tackled with a little careful planning. Liz Dolan explains how

Have you got a sackful of unopened bills and creditors' letters hidden under the bed? Have you got into a deadly cycle of borrowing more and more to repay existing debts?

Give yourself a break and stop running. The problems won't go away, they'll just spiral. If you don't want a history of bad debts to ruin your credit rating, you must tackle the situation head-on.

So how can you begin to break this awful cycle? Here are some dos and don'ts:

Devise a repayment plan. Work out a budget, showing how much you need to live on. The amount left over is what you're going to use to start paying off your debts.

Prioritise. Some debts are more dangerous than others. Sort them out first. Top-priority debts include: mortgages and other loans secured on your property; rent; council tax; County Court Judgments; electricity and gas; tax; hire purchase debts; TV licence.

Write to your creditors. They'll be delighted to hear from you at last. Tell them what you propose to do. Enclose the first month's payment, plus a copy of your budget plan, so they can see what you're spending money on.

Be realistic. Pick a figure you know you can afford. If you can afford only a couple of pounds, that's what you pay. If lenders demand more, tell them they can't have it and stick to your original plan, sending payments regularly each month.

Seek help. Various organisations offer free advice to people struggling with debt. They include: local Citizens' Advice Bureaux; the Consumer Credit Counselling Service (0800 138 1111); National Debtline (08459 500511); Debt Help UK (www.debthelpuk.co.uk).

  • Over the page: what to avoid

    Avoid
    Debt management companies. Why pay for a service that you can get for free? There are also horror stories about the way some of these outfits operate.

    Consolidation loans. Don't automatically be tempted to take out a loan to pay off all your debts. You may lose the flexibility to, for instance, prioritise creditors. Also, the loan may be secured against your possessions.

    Credit repair companies. Don't believe companies that offer to 'repair' a bad credit rating. It's not possible - legally anyway.

    Be wary of
    Sub-prime lenders. These are (mainly American) companies that lend money to people with bad credit histories at very high rates of interest. This helps them rebuild credit histories, but at a price. Exhaust all other avenues first.

    Tackling a bad credit rating
    But what if you think you've already got a poor credit rating?

    Here's a scenario you may recognise. Your debts are getting out of control and you apply for a loan to pay them all off in one go. Thanks, but no thanks, says the lender. We've checked you out and we just can't take the risk.

    Here's another. You find the kitchen of your dreams in your local department store and ask to pay for it in monthly instalments. The store makes a few checks and turns you away.

    What do you do next? Click over for some questions and answers that may help.

  • Over the page: answering your questions

    What sort of information do lenders have access to?
    Virtually every company that provides credit gives information to one or both of the major credit reference agencies, Equifax or Experian. Credit reference agencies keep individual credit files on millions of people and update them regularly.

    They list any existing credit agreements - ranging from mobile phone contracts to mortgages, but not overdrafts - plus details about how good or bad you are at keeping up-to-date with payments.

    Most of the main lenders provide this information because, if they don't, they're not allowed to make inquiries about other companies' customers. Credit agencies also use publicly available data gleaned from sources such as electoral rolls and court records.

    The agencies supply the raw data to lenders, who use different formulae to work out whether you're a good risk. They concentrate on things like your income, existing debts and repayment record.

    What should I do if I'm turned down?
    Don't trek from lender to lender until you find one willing to take you on. Every rejection leaves a 'footprint' on your file. The more footprints you amass, the more wary lenders become.

    Ask both reference agencies to send you a copy of your file - even if the lender that turned you down used only one of them. Everyone should do this on a regular basis, whether or not they've had problems with credit applications.

  • Over the page: how to get your credit file

    How do I apply for my file?
    Visit http://www.equifax.co.uk or send a written application to Equifax Plc, Credit File Advice Centre, PO Box 3001, Glasgow G81 2DT. You can call 0870 010 0583 (open between 8.30 am and 6.00 pm weekdays) for more details, but you'll still be asked to apply in writing - it's the law.

    Experian can be found at http://www.experian.co.uk or you can write to: Experian Ltd, Consumer Help Service, PO Box 8000, Nottingham NG1 5GX. The phone number is 0870 241 6212.

    Enclose a cheque or postal order for £2, made out to the appropriate company, plus your full name, date of birth and your addresses for the past six years. You should hear within seven days.

    What do I do if my files contain inaccuracies?
    Notify the credit agency as soon as possible, enclosing any proof you may have to back your case. If the lender admits it is in the wrong, the entry will be corrected or removed. If the lender disagrees, and provides sufficient proof, the information will stay on file. But you can still write a 'notice of correction', which will be added to your file.

    My files are overflowing with CCJs (County Court Judgements) and bad payment records. Am I stuck with a bad credit history for life?
    Not necessarily. It may take a while, but it's possible to rebuild your credibility with lenders. CCJs that are paid off within 28 days will not appear on your file. If you've paid up, but after the magic 28 days, the CCJ will appear on your file, but so will the fact that you've paid. CCJs are removed from your file after six years.

    If you're being unfairly penalised for the sins of a partner, parent or sibling who shares your address, write in and say so. If you have a joint account or other shared financial arrangements, this solution isn't open to you.

    If your relationship breaks down, tell the agencies immediately, so they can remove your ex-partner's name from your file.