If you’ve ever wondered how the UK credit rating system works, then you’re not alone. On average 165,000 people in the UK search online each month for the phrase ‘What is Credit Rating?’. What’s more, there are countless posts in forums from consumers asking credit-related questions, which are often answered completely incorrectly.

aqua card, a specialist lender for people with bad credit, has created an infographic which aims to clear up all the credit confusion. The infographic, aptly named ‘What is Credit Rating?’, explains what makes a credit applicant a high or low risk borrower and what banks and credit providers really know about you. To help consumers on their way, the graphic also includes a five-step checklist with tips on how to improve your personal credit score, with tips including using a credit card and managing it responsibly, and making sure you’re on the electoral roll.

Emma Davis, an online manager at aqua card, says: “We realise that lots of complex financial copy on a webpage can be overwhelming for customers, so creating an infographic was the perfect way to explain a detailed topic in a clear and concise format.”

The launch of the graphic comes at a time when credit is extremely prevalent in the news. In October 2011, Credit Action, a leading UK debt charity, revealed that the average amount owed by every UK adult is £29,546 (including mortgages). The debt charity also found that, as of the end of August 2011, the average UK adult has borrowed £4,257 using credit cards, motor and retail finance, overdrafts and unsecured personal loans. In addition, Credit Action calculated in October 2011 that 334 people every day of the year will be declared insolvent or bankrupt – the equivalent to 1 person every 59 seconds during a working day.

With this in mind, it seems that now, more than ever, UK consumers need to ensure they are informed and, if not already, working towards manageable debts.

Here’s the infographic:

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A report by Consumer Focus suggests that the number of people taking out payday loans has increased from 300,000 to 1.2 million in the last four years, with the amount of borrowing totalling £1.2 billion in 2009. The recession had sparked significant growth in the demand for short term loans as consumers were being squeezed financially from every angle and the number of other, more traditional unsecured loans reduced.

Increasing interest rates

Payday loans are designed to help individuals, especially those with bad credit, cover unexpected costs at short notice, until they next get paid. However, due to the risks associated with a relaxed attitude towards lending and lending small amounts, the interest rates on payday loans are very high. In fact, the ‘Keeping the plates spinning’ report by Consumer Focus suggests that the average interest rate per £100 of loan rose from 15% to 20% in 2009, something with which the Consumer Finance Association (CFA) agrees:

“A payday loan will typically range in price between £9.95 and £30 for each £100 borrowed over a 30 day period, depending on the lender,” said the CFA in its ‘Payday Lending Report’.

The Trade Body for Insolvency Professionals, R3, found that more than 2 million people have taken out a short term or payday loan in the last year alone. Based on a typical 30-day loan period and the average loan amount of £294, each individual person would pay £58.50 in interest charges.

However, should the borrower default and allow the loan to roll over for six months, they could end up paying back more than double the amount of the original loan (£645*).

The payday loan market has seen a spurt in the number of online loan providers over recent years so going online has since become the most popular way to obtain a payday loan. Consumer Focus has blamed the significant rises in the interest rates on short term borrowing on this increase in the online segment of the industry.

However in response to the claim that the uptake of payday loans is growing and that online providers are to blame, John Lamidey, CEO of the CFA, said: “There has been a growth in advertising [of payday loans] so people generally are more aware of payday loans, but that is not the same as actual growth.

“Note also that it was not until 1 January 2005 that it became legal to contract a credit contract online. Before then, there were no online payday loans, so inevitably there has been growth from scratch in that part of the market,” he added.

Preparation is key

At some point in our lives we all face unexpected costs, such as the car breaking down or a huge electricity bill. But in order to avoid having to take out expensive emergency payday loans, consumers need to be on top of their finances. While some consumers may turn to standard credit cards to help them out with unexpected costs, some consumers have to resort to taking out payday loans because they are under the impression that they are unable to obtain credit elsewhere. However, this can be done with a little shopping around.

Savings are of course the best way to pay for any unexpected bills because there is no chance that it will lead to bad debt and it won’t cost you a penny (in interest).

By putting away a small amount of cash each month you could build up a sizeable savings pot, which will come in handy when those big winter bills, or other unexpected costs, come rolling in because you can just pay for them in cash. Although this sounds great, it is often not feasible for people on a very tight budget.

Credit cards are another great way to avoid the higher costs of a payday loan, without having to use savings. Credit cards are even a viable option if you have a poor credit history because there are cards on the market for people with bad credit.

Consumers should keep a ‘spare’ credit card and not use it unless in desperate need of extra cash. Then, when payday finally comes around, simple pay off the outstanding balance, just as you would with a payday loan but without the huge costs. Most credit cards come with 56-days interest free credit (from the date of purchase and doesn’t apply if you withdraw cash) so you shouldn’t incur any interest charges if you pay your balance off in full and on time each month.

Credit building credit cards

Credit building credit cards (aka cards for bad credit) allow you to access credit while, at the same time, rebuilding your credit history. These cards come with relatively low credit limits and much higher interest rates than standard UK credit cards but they are still far cheaper than payday loans.

If you were to take one of the top credit cards for bad credit which, for example, offers a representative APR of 35.9% and didn’t have the 56-day interest free period, you could borrow £294 for the same 30 day period and only pay £8.80 in interest – a whole £50 cheaper than the average payday loan! If it did have the 56-day grace period, you wouldn’t pay a penny for borrowing £294 over 30 days.

Are payday loans worth it?

If you are fully prepared, you can avoid the costs of payday loans. However, one of the reasons for their rising popularity is the appeal of ‘instant cash’. Many payday loan providers offer the ability to have the money in your bank account within the day – some within minutes. If you need cash quickly then a payday loan could be your answer, but it is always better to prepare for emergencies and have alternative sources of credit available to you.

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As you are probably aware, in order to have access to the best credit card deals on the market you need to have a good or excellent credit score. However, the reality is that most of us do not have the best credit ratings due to missed bill payments or applying for too many credit cards, etc. Although not ideal, this is not the end of the world because there are ways to improve your credit score and get access to better credit card deals.

Starting from scratch

Lenders use your previous information (credit history) to help them judge your character and your behaviour towards money and borrowing. If you do not have any credit history because you have never accessed credit, you will have a poor credit rating. It’s a bit of a ‘catch-22’ really (in the sense that you need access to credit but find it harder to get a credit account because you haven’t had one before) so you need to find ways that your credit rating will be improved, and there are a few ways to do this.

However, whatever you do, it is absolutely essential that you keep to the payment terms, never miss a payment and try to pay off the balance in full to avoid interest charges.

Fixing what is broken

If you have a poor credit rating because of past problems it is never too late to start trying to fix it.

The first thing you need to do is contact a Credit Reference Agency, such as Experian, Equifax or Callcredit, to view your credit report. A credit report allows you to see what lenders see and so you can work out what you need to do to improve your credit score. The actions that need to be taken to fix a bad credit rating due to previous problems are pretty much the same as starting from scratch. You need to open a variety of different credit accounts and use them as a vehicle to improve your credit score. This will help you get access to better credit card deals in the future, but it is a waiting game.

Cancelling unused accounts

If you have a number of unused accounts in your name, which have a history of bad payments on them, you need to close these as soon as possible as they will have a negative impact on your credit rating.

WARNING: If you have a bad mark (e.g. missed a payment or gone over your credit limit) from within the past 3 years on the account you are going to close, wait until it has dropped off your file before closing the account, or it’ll stay on your credit file for a further 6 years.

However, if you have had a bank account for many years and you have used it regularly, but perhaps more recently favoured an alternative account, it could be beneficial to keep this open. If you have outstanding balances on any of these accounts, find the cheapest way to pay them off and close the accounts.

Using savings

Using savings you have built up over a long period of time to pay off debt is often a horrible thought and a difficult pill to swallow. However, reducing the amount of outstanding debt you have against your name is key to improving your credit score. You will be better off both financially and in the eyes of the lenders if you pay off expensive debts with your savings. Also, you will more than likely be paying out more on interest on your debt than you will be making on your savings anyway. Plus, the current economic climate is making it particularly hard for people who still have a huge mortgage, so putting your savings into your house could prove to be the best way forward.

Keep up with payments

It is absolutely essential that you never miss payments on credit cards, store cards, utility bills or any other type of credit account. In order to improve your credit score you need to ensure that you prove yourself to be the perfect borrower. It is always better if you can pay off large amounts of the outstanding balance or the full balance, but if you are struggling at least stick to the minimum repayment.

Other things that will help to improve your credit rating:

1.    Open a Credit Builder Credit Card
2.    Register on the electoral roll
3.    Start a mobile phone contract
4.    Open a Prepaid Card with a ‘Credit Builder’ facility

Finding credit card deals

Once you have managed to improve your credit score you should have access to some of the best credit card deals on the market. Although it may be exciting, this isn’t a time to lose your head, make sure you examine the market and use your options wisely.

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What are credit building credit cards?

The credit crunch has made it incredibly difficult for people without perfect credit reports to obtain the best credit card deals available. However, there are now plenty of alternative sources of credit on the market, one of the best being credit building credit cards (aka credit cards for people with bad credit).

These cards will have higher interest rates and lower credit limits than standard cards but don’t let this concern you too much when you are using them to build your credit rating because they will serve you well if you use them right.

The idea behind them is that consumers can use them to pay for stuff they would usually buy anyway (which is why the low credit limit isn’t a problem because it’s not the money you are after) and pay off the balance to prove to lenders that they can manage their credit responsibly.

Due to the high interest rates, consumers should not use these cards to spend, spend, spend, and then get into high monthly repayments. Instead, spend a reasonable amount, put the money you would have normally used aside, and then use the money you saved to pay the balance in full every month.

Over time, using credit builder credit cards will show lenders that you can handle money and a credit card, and you may then become eligible for the best credit card deals, including 0% credit card offers. This improved access to the credit card market will mean that you can pick and choose the top deals to make the best use of what credit cards can offer you.

What to spend it on…

What you choose to spend your money on is up to you. For example, you might decide to do your weekly shop on the card, fill up your car with a full tank of fuel, or even pay the gas and electricity bills. However, the most important thing to remember is that this type of credit card is not designed to give you extra money.

Using credit builder credit cards

Consumers looking to improve their credit rating should only be spending money they have in their bank account, not money they do not have. What we mean by this is that you buy whatever things you were going to buy with the money in your bank, but you use the card instead, you then use the cash you have to pay off the card.

It is also a good idea not to use the whole amount on the card – try to stick at around 60% usage. So, if you have a £1,000 credit limit, try spending around £500 to £600 every month on your everyday purchases, but repay the amount immediately.

Consumers should never look to obtain credit builder credit cards to use them like a regular card as this will only cause further troubles. The high interest rates are usually on a par with store cards, and this could cause your debt to further spiral. Borrowing for a long time, or for large amounts of money, should always be avoided with this type of card. Once you qualify for the best credit card offers, you can start using credit cards normally if you wish. ALWAYS remember that you will have to pay the money back.

The future

After around six months of sticking to a strict “buy and pay” routine with your credit building card, you should be at a point where you can apply for a standard card. This is fantastic news because it will have a dramatically-reduced interest rate and will mean you have access to some of the best credit card deals. The 30% APR will be long gone, and you may even be able to take advantage of some of the 0% purchase and balance transfer credit card offers.

Once you have your shiny new credit card, close the old account as you will no longer have any need for it. Don’t go wild with spending on the new card, use it wisely still. The purchases you make with your credit card will continue to influence your credit score, so be responsible.

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Over recent years, virtual credit cards have been more and more common. They have become a useful alternative to prepaid cards and other credit cards for fair credit and our guide looks at what they are, who they’re ideal for and what the main alternatives are.

What are virtual credit cards?

Virtual credit cards are a type of payment card that works in much the same way as a traditional credit card. However, the main difference between a virtual and a traditional credit card is that no physical card actually exists. Virtual credit cards can either be printed on paper for the duration of their use or simply exist in an electronic format.

When you need to make a card payment online or by telephone, the card details (card number, security number and expiry date) are all generated electronically. Depending on the provider of your virtual credit card the card information is either generated on a piece of software downloaded to your PC or on the card provider’s website.

Who are virtual credit cards designed for?

There are two main types of people that virtual credit cards are designed for.

Firstly, they are perfect if you already hold credit cards but you don’t want to disclose your card details to retailers.

Secondly, they are an excellent alternative to guaranteed approval credit cards or credit cards for fair credit. If you are struggling to be agreed for a credit card – perhaps because you have a less than perfect credit history – then virtual credit cards can work as a ‘prepaid’ card, helping you if you can’t get a credit card elsewhere.

The pros and cons of virtual credit cards

If you want to pay for goods and services from a retailer who you do not 100 per cent trust, virtual credit cards can work well. They enable you to avoid providing your actual credit card details to the retailer and, if the service is offered by your credit card company, you don’t even need to open a new account.

Virtual credit cards are also a good alternative to guaranteed approval credit cards if you want to buy goods and services by telephone or online and you don’t have a credit or debit card.

Bear in mind that virtual credit cards are only for ‘card not present’ transactions and so you can’t use them in High Street stores. They are designed for online and telephone use. In addition, you may have to download software to generate your card details which means you can’t use them if you’re away from your PC. And, as you get a different card number each time, you will always have to fill out payment details when you buy something online.

What are the alternatives to virtual credit cards?

If you’re struggling to be accepted for a credit card then you could also consider guaranteed approval credit cards. These cards are available to everyone, irrespective of their credit history.

In addition, credit cards for fair or bad credit are also available, although you may pay a higher rate of interest on these cards than on traditional credit cards.

Prepaid cards are also increasing in popularity. You load money on to a prepaid card and then use it to pay for goods and services or to withdraw cash from an ATM. You can never go overdrawn and there is no interest to the card provider.

Online services such as PayPal and Google Checkout are also viable alternatives to paying for goods and services. These systems hide your card details from retailers, although you do have to link these services to a credit or debit card.

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With 1,603 County Court Judgments (CCJs) issued every day in the final quarter of 2010 and a person in the UK declared insolvent or bankrupt every 4.28 minutes, it’s no surprise that thousands are struggling with poor credit ratings.

When people get back on their feet and regain control of their finances, one of the first things they want to know is how to improve their credit rating. Our guide outlines five easy ways you can rebuild your credit standing.

1. Make sure the information on your credit file is correct

A common reason why people have a less than perfect credit rating is because there is incorrect or inaccurate information on file. If the information held by a credit reference agency is incorrect it stands to reason that there may be discrepancies when you come to apply for more credit in the future.

For example, you may not have changed your address on certain financial products when you moved home. Alternatively, your bank may have made an error regarding a payment which they have never corrected. It is wise to look carefully at your credit information in order to make sure that it is accurate.

2. Get on the electoral roll

One of the simplest ways that you can improve your credit rating is by ensuring you are on the electoral register. This is a crucial part of the underwriting process for many lenders and you will often be penalised in a credit score if you’re not on the voter’s roll at your current address.

You don’t have to wait until the annual reminder to be added to the electoral roll. You can write to your local council and be added at any time.

3. Use credit builder credit cards

There are lots of credit cards for bad credit available in the market. These cards are offered to applicants with a less than perfect/slim credit history and are designed to help you improve your credit rating by demonstrating that you are capable of managing credit responsibly.

Credit builder credit cards typically carry higher interest rates than other credit cards and so it’s vital that you compare credit cards before choosing one. The aim of credit builder credit cards is that you use them for purchases and then pay off your balance in full each month on time. Over a few months, your credit record will show that you have consistently made a payment to your credit card each month, demonstrating to future lenders that you are a good risk and that you will pay your commitments.

4. Make sure you manage your credit responsibly

The best way that you can improve your credit rating is to ensure you make all payments to loans, credit cards for bad credit, mortgages, secured loans and store cards on time.

Your credit file will record any late or missed payments and so it’s vital that you try and ensure all your payments are made in full and in a timely fashion every month. Only by demonstrating that you can manage financial commitments will you be granted further credit in future.

5. Regularly review your credit file

Once you have started using credit cards for bad credit and you are making your payments every month, it is important that you obtain a copy of your credit file on a regular basis to ensure the information remains accurate.

Regularly reviewing your credit file will ensure that the information held about you is accurate and up to date and will help you monitor for any fraudulent activity taking place under your name.  Most experts recommend obtaining a copy of your credit file from a credit reference agency, such as Experian, at least once every year.

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The demand for poor credit finance, including credit building credit cards and personal loans, remained high in 2010 after one third of all credit card applications were declined due to poor credit. The research from Equifax, published in the Daily Express, also found that a third of those declined had no idea why they were refused credit.

Poor credit card knowledge sees applicants refused deals

Neil Munroe from Equifax, one of the UK’s leading credit reference agencies, said: “The credit card market is still relatively subdued as lenders remain cautious about who they extend new credit to.”

One of the ways that you can increase your chances of avoiding credit builder credit cards is to regularly check your credit file.

Mr Munroe continued: “It’s vital consumers understand…how they can make sure their credit rating is at its best for them to get the most favourable interest rate.

“More than half of those who were refused a new credit card simply gave up applying. If they had checked their credit file they may have found they could do something to improve their chances in the future.”

There are various ways that you can improve your credit rating, such as ensuring you are on the electoral roll, correcting any personal information that is inaccurate (such as your address) and querying any adverse credit that has been registered in error.

Poor credit finance can help rebuild credit rating

If you have been refused credit due to a poor credit rating, credit building credit cards are a good way to help rebuild your credit standing.  A poor credit card can help you demonstrate that you are capable of managing a credit card responsibly by making your repayments on time every month.  By proving that you can manage poor credit finance, your credit rating will improve making it much more likely you will be approved for a leading credit card in the future.

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According to the ft.com, UK household utility bills look set to double every five years until at least 2020. These huge hikes are predicted due to the vast amount that utility companies need to invest to meet both future demand and environmental obligations, such as the Carbon Emissions Reduction Target.

The reasons behind the rocketing prices are laudable and understandable, but many households will find the rise in costs a huge strain on already tight finances. So, how can consumers keep on top of rising bills if income isn’t climbing at the same rate?

To start with, it makes sense for people to take a closer look at their spending – are there any unnecessary expenses that could be cut out to save money? People can also ‘jam jar’ their money by putting cash aside for their critical everyday living expenses, such as paying utility bills.

A prepaid credit card is the way forward for many people. All the customer has to do is top up their card with the amount of money needed to cover their bills – straight after pay day usually tends to work best. Then whatever further calls on their money are made, they can rest easy because they know that they’ve reserved the cash needed to stay on top of those rising water bills and shocking power bills.

One of the leading prepaid cards in the UK is the Cashplus prepaid Gold MasterCard®.  Cardholders can choose the ultimate in bill paying convenience: they can set up as many as 20 standing orders to automatically take care of their bills and subscriptions. So as long as the customer keeps topping up their account with the relevant amount, they need never miss a bill again or be hit by unexpected penalties that would further bite into the household budget.

And of course, they can save themselves valuable time and money spent on travelling to pay a utility bill in person.

Most prepaid cards allow customers to keep track of their outgoings 24/7 via free transaction tracking online, and get balance updates by opting for a text service. The latter are especially handy when out and about without access to an online computer.

Cashplus has made sure that topping up the account is convenient too – there are over 13,000 locations right across the UK where customers can top up for free.

With the rise in the cost of living and the stall in wage increases, plus a reluctance to hand out mortgages, it wouldn’t be surprising if there was a trend towards more people getting to together to rent a place. Again, prepaid cards can help keep on top of bills, because they’re ideal for pooling money to share the running costs, which is helpful for house-shares in particular. In fact, with some prepaid cards you can add up to four additional cards to one account.

It’s ironic that the very people who would find a card a great budgeting tool, are often excluded from having one. But with a prepaid card, acceptance is guaranteed for anyone aged 18 or over that lives in the UK. So the prepaid sector can help practically any household to budget for the dramatically rising cost of utility bills.

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Increasing numbers of Brits are turning to credit building credit cards having been refused credit in 2010, according to new research. The figures come as charity Credit Action reports that the total personal debt in Britain at the end of February 2011 was £1.454 billion, with someone declared insolvent or bankrupt every 4.28 minutes.

Millions turning to poor credit finance having been refused credit in 2010

The research from a leading price comparison website found that almost 4.5 million people were refused credit in 2010. With household debt rising (the average household debt in the UK is now £57,697), more and more people are expected to struggle to pay their credit cards and debts in 2011.

A study by a rival comparison site found that 22 per cent of people will be struggling to pay back the debt they owe on their credit cards in 2011. Late or non-payment will reduce their credit rating, increasing the numbers of people who will have to turn to poor credit card finance in the future.

Credit building credit cards can help you repair your credit rating

If you are one of the 4.5 million people that were refused credit in 2010, or if you have defaults, County Court Judgments (CCJs) or late payments on your credit file, you may find it tough to be approved for a credit card.

This is where poor credit finance can help you. Credit building credit cards are designed for people who have a less than perfect or ‘slim’ credit history. They allow you to use a credit card and make your payments on a regular basis, proving to future lenders that you are capable of managing credit responsibly.

Poor credit cards nearly always carry higher interest rates than standard credit cards (as they are a riskier proposition for the lender) but if you pay on time every month they can help you rebuild your credit and improve your chances of being approved for standard loans or credit cards in future.

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How good is your credit score?

With lenders ever increasingly using credit scoring to make lending decisions, having a good credit score has never been more important.

One way to improve your credit score is to use ‘credit building credit cards’. Our guide explains how these cards can help build a good credit score, as well as outlining two other ways that you can improve your credit rating.

Credit building cards can help build a good credit score

You may be surprised to learn that the most common reason applications for credit in the UK are declined is not for ‘bad credit’. In fact, the most common reason to be knocked back for a loan or credit card is because of ‘thin credit’ – where there is insufficient information about you on file for a lender to make a decision.

So, it is important that you build up a good credit record. Credit building credit cards allow you to demonstrate to lenders that you can manage credit. By using credit building cards and making all your payments on time, your credit record will show that you are capable of responsibly managing your borrowing.

If you do have poor credit, bad credit credit cards will again help you to repair your credit score.  Over time, making all the necessary payments to your poor credit credit cards will prove to future lenders that you are a low risk.

Make sure you are on the electoral roll

One of the easiest ways you can improve your credit rating is to ensure you are on the electoral roll.  Don’t wait for your annual reminder; contact your local council and make sure you’re on the voters roll straight away.

Make your payments on time

If you miss a credit card or loan payment, that will stay on your credit file for up to six years. A silly oversight can therefore prove costly for a long time. To protect your credit rating, make sure you always make at least your minimum repayments on time.

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