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How does my credit history affect my ability to borrow?

I think we are all a little worried about money at the moment. Actually; however much we earn. The constant talk of cost-of-living increases, food and energy, interest rate rises which will push up our mortgage payments, now petrol too.

So how are we going to get through this?

It’s naive to bank on a lottery win so I figure it’s got to be budgeting in the first instance – cutting out some of our discretionary spending, in favour of ‘must haves, with potentially a bit of borrowing tacked on the end to spread some of these very ‘hyped’ costs over a slightly longer period than just ‘pay it now’.

The former will require a review of your monthly receipts, bank and credit statements to assess what you’re spending, what you can live without and how much that gives you to go towards these increased costs.

The latter will mean an approach to a lender, and you need to get ready for that.

When it comes to borrowing, whether it’s a short-term personal loan, a mortgage or even a phone contract, lenders will use your credit score to determine if you’re a good fit for their business.

Lenders will also look at your credit history to see how reliable you’ll be as a customer based on factors such as your annual income, total amount of current debt, what other financial products you have and if you make your repayments on time.

So how do providers decide if they’re going to lend to you?

When you apply for a loan, loan companies will use a variety of factors to determine if you’re a good customer fit for their business. These factors may include how much borrowing you have outstanding, if you’ve defaulted on any payments or even how many times you’ve moved to a new house recently.

What can affect your credit report?

Late or Missed Payments

Any late or missed payment will be marked on your credit report and will have a negative effect on your overall score.

What’s more, a missed payment can stay on your account for up to 6 years, so it’s vital that you make your minimum payments on all outstanding agreements each month.

If you’re struggling with this, the worst thing you can do is ignore the issue and hope that it goes away – it won’t. Contact the company and explain your situation to see what payment plan can be put in place. Remember making a payment, even if it’s not the full one, is better than not paying at all, but make sure you discuss it with your lender first.

Using too much of your credit limit

Just because you have a high credit limit, doesn’t mean you should go and spend it all at once.

If you’re constantly at your limit and only paying back the minimum every month, this can be a red flag to lenders.

Keeping your credit utilisation at no more than 30% of your overall limit is ideal and will demonstrate your ability to manage your money more effectively.

Moving home too frequently

Lenders like to know that you’re reliable and stable. One way they do this is by checking how long you lived at past addresses.

If you have a tendency of moving often or failing to register on the electoral roll, this can go against you in the long run, even if you pay all your bills on time.

Applying for credit

Don’t make the mistake of applying for loan after loan in quick succession as it could damage your credit file. Every application will leave a record on your report, and too many applications won’t look good to lenders.

If you want to compare APRs (this is the cost of credit), look at price comparison sites which conduct soft searches as these don’t show on your file.

CCJs, IVAs, or Bankruptcy

Having a Country Court Judgement (CCJ), an Individual Voluntary Arrangement (IVA) or declaring bankruptcy will be public record, on your credit report and could make it difficult for you to borrow from a reputable firm.

Mistakes on your credit file

Sometimes these do happen and, even if it’s not your fault, they can still have a negative impact. By keeping on top of your credit report and checking it often, you will be able to spot errors and apply to have these rectified.

Common mistakes are incorrect names or addresses, whether you’re on the electoral roll and your current debt level. Not being on the electoral role definitely makes getting credit harder.

Having no lending history

As silly as it sounds, if you owe nothing and pay all your bills outright as they arise then you might end up with no credit history which can be as harmful as a bad one as lenders don’t know whether you’re an ideal customer or not.

Try using a credit card to pay for a few regular monthly outgoings, maybe petrol, then pay it off in full before it incurs any interest. This will leave a footprint for lenders.

If you have a low credit score, how does it affect you?

Having a low credit score can be an indication to a lender that you’re a “high-risk” borrower. Unfortunately, any loan you get offered will most likely be at a higher interest rate or possibly your application could be refused.

It doesn’t stop there – not only could you be denied a credit card or loan, but you could also be refused a tenancy if you’re renting, you might not be able to take out a phone contract and it may even affect the chance of getting that job you want as some businesses run a credit check as part of their recruitment process.

So, to summarise, to get through this, adjust spending patterns in the first instance where you can, apply for credit if you think it’s needed and your credit file will stand up to scrutiny, if it won’t then commence your file’s rebuild using the tips and tools detailed above.  The rebuild might take you a while, and lock you out of formal credit applications this time, but it will give you options for the future and that can only be a good thing……

If you or a loved one is in immediate crisis...