Whenever you apply for a loan or a credit agreement for something like a mobile phone, your credit file will be looked at. It gives any potential lenders a complete overview of your finances and whether you handle money responsibly. This report helps a lender to make a decision about offering you a loan or a credit agreement so it’s important to know how you can end up with a bad credit score. If you avoid the following mistakes, it may well help you to keep your credit score in check.
Not making payments on time
If you’re late making payments, then it’s obvious to a lender that you don’t have money readily available each month. Even if you only pay late once, it will show up on your report. Try to make sure there’s enough money in your bank to meet payments. If for some reason you know you haven’t got the cash because you’ve been paid late or you’ve changed your job, talk to your bank about an authorised overdraft. Never enter an unauthorised overdraft because some banks will charge you more interest than a payday loan.
Missed payments have the same effect as late payments. Lenders will conclude that you don’t earn enough to pay back what you borrow and you can’t deal with your finances responsibly. They’ll also know that there is a higher risk of non-payment.
Not paying back the loan in full
Leaving outstanding debt from a loan will cause your credit score to plummet as it suggests to a lender that you haven’t been able to pay. If you’ve left one loan unpaid you’re more than likely to do it again and this makes it harder to get credit.
Having County Court Judgements against you
A County Court Judgement is proof that you didn’t pay off a debt and the lender was forced to enter court proceedings. If you have a very good reason for the judgement, you can write to the credit agencies and have a ‘Note of Correction’ attached to your file. This is an explanation about the County Court Judgement which a lender can read. It won’t change your score, but it might make a lender think more positively about giving a loan if the reason is good enough.
Being made bankrupt
If you have been made bankrupt either by a creditor or because you’ve applied yourself, it is highly unlikely that you will get credit. If you do, it will be because you weren’t asked about it and a lender hasn’t checked your file. However, you must by law declare your bankruptcy for any loans over £500. If you don’t and you’re caught, your bankruptcy conditions can be extended for up to 15 years. Bankruptcies will usually be discharged after 12 months and then you can apply for credit, but you will probably have difficulty getting approved immediately.
Leaving debts until the bailiffs or debt collectors come calling
If you have a County Court Judgement and you pay it within a month, it won’t appear on your credit file. If you pay it, but it’s later than a month it will also show up on your file, but it will show lenders that it has been paid. If a lender can see that bailiffs or other debt collectors applied for an order, then they know that you have not been able to pay the debt off. That will lower your credit score considerably.
Multiple loan requests
Every time you make an application for a loan, it shows up on your credit file. A lender who sees more than one application over a short period of time will conclude that you are not handling your money properly. This makes you a higher risk for a lender because you might not be able to pay back the loan. If you are just making enquiries, ask the company to put the searches down as ‘query searches’. This type of search can’t be seen by a lender, although you will see them if you check out your file.
Maxed out credit cards
If you have credit cards and you’re paying them back on time, that looks good. But, if every card you’ve got is up to its limit, that’s a red flag for a lender. Try and keep credit card debt low as you will appear to be handling your finances well and this is a plus point.
Closing a card that has credit
Some lenders see this as a sign that you are not utilising the credit that’s available to you and this has a negative effect on your score. Other lenders see it as a risk because you’ve got a card which you could spend, making it difficult for you to pay any loans. If you want to close a card because you have others, don’t pick one you’ve had for a long time because it will have a history of payments which helps your credit score.
Closing a card when there’s money owed
If you close a credit card down and you still owe the company money they will put a note of this on your credit file. A lender will be able to see that there is an unpaid debt and you are unlikely to be offered any credit.