Don't be bullied by credit card companies

Credit card companies are using people's fear of a bad credit rating to sell products. But don't let them bully you. Ruth Jackson explains how your credit report works, where to get a copy of it for free, and three simple ways to improve your credit rating.

Credit card companies are using a new ploy to hang onto customers. Fear.

Last week I applied for a new credit card. My application was accepted. But when I received the final details my credit limit, and the interest rate I would pay I decided the card wasn't for me after all. So I phoned up the credit card company and tried to cancel it.

That's when the representative from the credit card company really started to lay it on.

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She warned me that my decision to cancel this card would appear on my credit report. And because of this she said - I would struggle to get credit in the future. Leaving aside the fact that this is a pretty nasty tactic for keeping customers, it's not actually true.

Luckily I knew this, so I continued with the cancellation. But if I hadn't had this knowledge, I could easily have been bullied into keeping it.

So it's time to get familiar with your credit record and what affects it. Otherwise you too could fall prey to manipulative tactics by lenders.

How your credit report works

Credit reports are compiled using information from both public records, such as the electoral roll, and also information provided by lenders and other financial institutions. The contents can affect whether you get credit at all and at what rate. Typically, the information is reduced to a single credit score the fewer blemishes (bankruptcies, late payments and so on) that appear, the higher this will be and the easier it is to obtain new loans.

So, a credit score really matters. But there are at least three common myths about credit reports that we need to debunk.

1.Checking your credit report can harm your credit rating: FALSE.

Almost half of us believe that viewing our credit report will leave a "footprint" that could affect our credit rating, says Emma Simon in The Daily Telegraph. This is not true. You can check your report as often as you like.

2.It's how I use my card that is important: FALSE.

Credit reports record your credit limit. So if your limit is £7,000, that is what the lender will look at even if you only spend say £400 and pay off the balance every month. So if the total amount of credit available to you looks too high, a lender will reject your application. To avoid this risk, cancel old credit cards and ask for your credit limit to be reduced if you aren't using it. The same goes for overdrafts.

3.If you are turned down for credit it will show on your report: FALSE.

"Nine out of ten consumers think being rejected for a loan or credit card will adversely affect their credit rating," says Simon. This is not true. All applications for credit are indeed recorded on your credit file, but not the fact they were accepted or rejected.

However a report that shows you making numerous credit applications in a short space of time can set alarm bells ringing with lenders. This is annoying as it makes shopping around for the best deal more difficult. Changes to the system are being debated in Parliament, but I wouldn't hold your breath for anything to happen. The Information Commissioner's Office has already said that it believes the fact that multiple credit searches can adversely affect a credit rating is "justifiable".

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But there is some good news. Experian, one of the big three credit report agencies, has told that in general, you would only have a negative effect on your credit record if you put through "more than five credit applications within a three-month period". So don't apply for credit more than five times in three months (hopefully not a problem for most people) and you should be fine.

How to get a copy of your credit report

It's relatively simple to improve your credit rating and it's well worth doing. By law, credit reference agencies have to provide you with a copy of your credit report for £2, so ignore offers of expensive "credit monitoring" services. Better still, there are a number of ways you can get your report for free.

The big three credit agencies, Experian, Equifax and CallCredit all offer free trial services. So sign up, get your free report, then cancel before the trial period is up.

Once you've got your report, check that it's accurate. Complaints about credit reference agencies providing incorrect information rose by 40% during the 12 months to the end of September, according to the Financial Ombudsman Service. The agencies themselves probably aren't getting any worse, it's just that more people are now checking their reports more carefully. If you think anything on your report is wrong, tell the credit report agency straight away.

Three simple ways to improve your credit rating

Credit scores matter. So here's how to boost yours.

Firstly, make sure you are on the electoral roll. Lenders are very reluctant to lend to people whose name isn't on it so get registered to vote with your local council.

Secondly, as mentioned before, reduce the amount of credit you have access to. Cut up credit cards when you don't want them anymore and then call the provider and cancel the card. Also reduce your existing credit limits and overdrafts if they are higher than you need.

Finally, set up direct debits to pay off at least the minimum amount on all your credit cards and bills, so that you are never late paying or forget to pay completely. Even one missed payment will be marked on your report for 36 months.

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Ruth Jackson-Kirby

Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings and credit cards to pensions, property and pet insurance. 

Ruth started her career at MoneyWeek after graduating with an MA from the University of St Andrews, and she continues to contribute regular articles to our personal finance section. After leaving MoneyWeek she went on to become deputy editor of Moneywise before becoming a freelance journalist.

Ruth writes regularly for national publications including The Sunday Times, The Times, The Mail on Sunday and Good Housekeeping among many other titles both online and offline.