Why some debt is good debt

When it comes to your credit rating, some debt is good debt.

Of course, it has to be the kind of debt which is easily kept under control, but having a ‘thin’ credit file can end up making life difficult for you.

Turned down

Take the case of broadcaster Katie Allsop’s mother-in-law who was ‘personally insulted’ when she was turned down for a mobile phone contract because she didn’t have a credit rating!

Mrs Gretchen Anderson owns an antiques shop in Kensington, West London, where she employs three people and has held a bank account for 60 years.

Credit history

But she has never borrowed money and doesn’t pay her utility bills by direct debit.  Therefore, she has no credit history.

She is not alone.  Experts say the problem affects thousands of older people who handle their money the same way.

Confidence

To avoid getting in the same situation, the experts say it’s a wise move to try to beef up your credit score and thereby give lenders more confidence in your ability to manage credit.

It’s easy to do, according to finance expert Andrew Webb of Equifax.

Fraud

The first step is to make sure you’re on the electoral roll as this is used by many companies for identity verification and in order to combat identity fraud.

Next you should consider creating a credit history by using a number of different types of credit which are easily kept under control.  You might consider credit cards or store cards or just switch paying for your gas and electric to direct debit.

Consistent

This produces a steady and consistent pattern of meeting your financial commitments, but is crucial that you make your payments on time or you will be doing yourself more harm than good.

Says Mr Webb: “Keeping your credit balance low and within your credit limit indicates good money management and settling debts such as personal loans or hire purchase agreements demonstrates responsibility in repaying debts.”

Factors

James Jones, another expert from Experian, says credit scoring looks at a wide range of factors to build up a picture of how likely you are to repay any future credit.  Extra scoring points are awarded for more mature credit accounts because they demonstrate your on-going to commitment to pay off what you owe.

It’s also important to keep your eye on your credit report and fix any errors you find like debts being paid off but not updated.