Bad Credit Rating – What To Do

Bad credit rating

If you have a bad credit rating that may be the result of badly managed credit card bills or loans that you are unable to keep up, or other reasons, don’t worry. You can take steps to repair it.

Change Your Habits For Good

Before you do anything, you must ensure that you change your spending habits for good. Even though this guide will show you a number of ways to improve your credit rating if it is bad, none of this will be important if you do not take responsibility for your finances and debt. If you don’t make any changes to your habits, you will undo all the good work you achieve.

In simple terms this means that:

  • if you have a credit card, try to pay off the credit amount every month.
  • if you have a loan or mortgage, make sure you make the required payment at the required time.
  • if you have any other kind of loan or credit agreement, make sure you are fulfilling your side of the arrangement.

If you are in any doubt, speak to your lender to clarify exactly what you need to play and win.

Here are some actions you can take to turn around your bad credit rating and make you more appealing to potential lenders.

Check Out Your Credit Report

Get hold of a copy of your credit report from a credit reference agency and make sure your name and address details are fully up to date. This means checking any name changes have taken place and are current on your credit files – eg maiden or married name changes, etc.

Also make sure that your current address is shown on the file and that credit reference agencies are not checking against an old address

Inaccuracies

After you have obtained your credit history from a credit reference agency, you should also make sure that all the details are correct and up to date. In particular, make sure that there are no records of debts that you have paid off or closed. Although credit reference agencies will have notes of the previous loans, you should make sure that the records show these debts have been completed.

Electoral Roll

An essential action to help you improve your credit score is to ensure that you are on the electoral role at your current address and that your details are accurate and up to date. Inaccuracies such as incorrect house numbers can cause significant detrimental effects to your credit rating.

Notice Of Correction

If you have missed payments in the past which have affected your credit rating, you can take advantage of a ‘notice of correction’ that is provided by credit reference agencies. These allow you to explain why a period of bad credit performance arose, such as payments that were missed on a loan. Make use of this facility because it can often provide potential lenders with detailed information about your history and circumstances that they may not be able to see from a simple rating score.

Outstanding Debts

To improve your credit rating, where are the most important steps you should take is to make sure you pay off any outstanding debts as soon as you are able. This is particularly important if you have missed payments or only made partial payments in the past.

Don’t Let History Repeat Itself

It is very easy to run up debts and/or lose control of your finances – whether it be through overspending and not making payments to loans, or running up credit card bills that when you know you will be unable to pay. Whatever the reason, you must try to act in a disciplined way when it comes to spending money. Very simply, this means not spending money that you do not have. Shopping sprees have to be paid for at some stage; so do new cars, new telephones, holidays etc. If you do not change your habits and make sure you only spend what you can afford, you will end up in the same situation and have to make drastic repairs to your credit rating. This could affect your potential together mortgage or credit in the future.

Key Person Protection

The purpose of Key Person insurance must be to meet profits lost from the death or critical illness of the key person. The time to test the purpose is when the policy is being effected and it is important to keep records of the reasons why the policy was effected because it may be necessary to prove this to HMRC at the time of receipt of the proceeds. If the policy is taken out as security for a loan, the premium would be disallowed, because it is not to replace profits.

Income tax is the relevant tax paid by a partnership or sole trader in respect of Key Person insurance.

The sole relationship between the business and the life assured must be that of employer to employee. Working directors are employees for this purpose.

Any policy with a surrender value would not qualify, because a part of the premium goes towards investment. This would apply to whole life policies and unit-linked whole life policies taken out on a maximum cover basis.

Purpose of Key Person insurance

Wholly And Exclusively

The ‘wholly and exclusively’ test means that, to be treated as a business expense, the premiums must be ‘wholly and exclusively laid out or expended for the purposes of the trade’. If there is duality of purpose, this will result in non-deductibility.

  • If the life assured has a significant shareholding in the company, the test is failed because the policy is partly for the life assured’s own benefit.
  • There will be no tax relief where a parent company insures a key person in a subsidiary or associated company. In this scenario, there would probably also be difficulty in establishing insurable interest.

For Key Person Insurance premiums to be allowable for tax relief, the policy must be an annual or short-term assurance. These would not be eligible for tax relief:

  • Single premium policies, unless for one year only.
  • The maximum term should be how long the employer believes the employee will be useful to the company. That could be just a few years, up to the employee’s expected retirement age, but any term chosen may need to be justified.

Corporation Tax Relief

The main criteria that must be satisfied if premiums paid to a key person policy are to attract corporation tax relief are:

  • The key person’s relationship with the business is employee and employer (if the life assured has a significant shareholding in the company, relief is unlikely to be given).
  • The policy must be to replace loss of profits and not to cover a capital loss (such as a loan).
  • The policy is an annual or short term insurance.

Term Assurance

Term assurance may seem the automatic choice for Key Person protection, especially where the key person is working on a short-term project, or where the company is expanding rapidly. It may also be suitable for a new company, which may not be able to afford any other kind of life assurance. However, there are some significant disadvantages to term assurance in this respect:

  • Critical illness cover may have to be provided separately from the life cover and this is more expensive, although the amount of cover is greater because two claims could be made.
  • Some policies may not offer protection against inflation, so the value of the sum assured may decrease in real terms. In practice, a key person’s value to the company is likely to increase over the years.
  • Not all policies incorporate increase options and those that have are usually unable to cope with sudden large increases, e.g. on promotion.

Compared to Term Assurance, Flexible whole of life assurance may be more appropriate in these instances:

  • Where the key person is likely to be important to the business over a longer period.
  • Where the key person is expected to make a significant contribution during their working life.
  • Because it has more facilities for increasing cover on an annual basis or on other events compared with term assurance.

How To Manage Your Money

How To Manage Your Money

We often find that we have run up a bad credit score when it’s too late. Maybe we’ve mismanaged our money in some way – like overspending or indulging themselves on a holiday we couldn’t really afford or can’t resist a new car model that came with an appealing finance package. Whatever the reason, we can all take steps to manage our money better.

Money Control And Management

It might not sound like the kind of subject you would want to study at university, but controlling and managing your money is the biggest it can take in improving your credit rating. This in turn makes you more appealing to potential lenders when you come to consider a loan in the future.

Tackle Your Personal Finances

If you’re the kind of person who keeps a meticulous record of all your spending and receipts, you’re probably not going to need these tips. However if you’re like most people, who have a vague idea about how much money they’ve got in their current account and what money they owe, you might like to read through the steps to get a few tips about better personal finance management.

Every Day

Keep A Record

Keep a record of what you spend every day so that your contract with your expenditure on items such as food and drink, clothing, travel costs, entertainment, etc. There are a variety of computer programs and apps that will enable you to do this easily and quickly.

If you keep a record for a month or two, you will quickly be able to see where your spending is wasteful. You might find your spending lots of money on unnecessary coffee out or gym membership that you don’t use or comfort purchases such as cakes, ice creams etc.

You’ll be amazed to see how many times a muffin in your local coffee bar appears on your list of receipts or a sausage roll at lunchtime. These kind of items quickly add up and can account for a sizeable amount of money over the course of the year.

Every Week

Interrogate Your Current Account

Look through your bank account in detail and see which standing orders or direct debits are due to be paid. Examples include council tax, mortgage payments or rent, utility bills, pensions or Life Insurance. These are all usually large payments.

If you have a handle on what kind of expenditure you will be making during the course of the weeks and months ahead, you will be able to budget for it and you will find that you will be able to anticipate any potential shortfalls in money. If you can anticipate problems you can prevent them from happening.

Create A Weekly Spending Plan

Once you have an idea of your daily expenditure and likely outgoings, you should create a weekly spending plan that you should stick to. You will know exactly how much money you can spend.

Every Month

Pay Off Your Credit Card Bill

Try to pay off your credit card bill in full. Not only does this improve your credit rating, but also means you won’t incur any interest charges on the balance. If you can’t afford to pay it off, try to pay off as much as possible in order to minimise the balance and therefore minimise the amount of money you owe the credit card company next month.

You could consider replacing your credit card with a prepaid card that might give you greater control over managing your money.

In the future, try to discipline yourself to spend money on items that you can afford to pay off within the next month.

Every Quarter

Mortgage Payments

If you can afford to overpay a little bit on your mortgage payments every month, you will save yourself many thousands of pounds in the long term. So if you have been able to stick to your weekly spending plans, and made sure that you have lived within your means, you might find that there is a little surplus money left over at the end of the quarter. Try and use this to overpay your mortgage or add to some other tax efficient savings.

Every Year

Annual Payments

There are often a number of payments that are made annually such as car insurance, house insurance, etc. Make sure you budget for these when they are due to be paid so that you will have no nasty surprises, and end up in debt.

Financial Review

You should look to consult with a financial adviser about what kind of long-term investments you could be making. Once you have your spending under control and have a good credit rating, you may find that you have extra money that can be used to create a pension or savings investment from which you can benefit in the future.

A good financial advisor will also help you with your budgeting and may be able to recommend different kinds of bank accounts or savings vehicles that will enable you to be more financially proficient

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