Credit score and debts

People generally feel that having a good credit score is better than having a bad credit score. But what is a credit score anyway? And what happens if yours is bad?

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Credit can be approved or declined depending on your credit score (also known as ‘credit rating’) which is held on your credit file/report.  Whenever you take out credit, this is recorded by credit reference agencies (CRAs). 

The 3 main ones are Experian, Equifax and CallCredit. As well as personal information,  CRAs also keep track of other information, such as when you miss a repayment,  make a lower repayment than originally agreed or even default on a credit agreement altogether.

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Credit check

When you make an application for credit (for example a loan, a mortgage, a new credit card, a mobile phone contract or a Hire Purchase agreement), the party offering the credit (the lender) will naturally want to make a decision based on the likelihood that you’ll keep to the credit agreement and make all your payments.  Viewing a copy of your credit report/file may help a lender reach a decision as to whether or not they believe they will be lending responsibly to you. 

Each lender will have a series of credit qualifying criteria that they look for when assessing an applicant’s suitability, and they check these qualifying criteria against the credit information stored by the credit reference agencies about you. If you match a lender’s qualifying criteria and the lender is satisfied that conditions of the borrowing can be maintained the lender may agree to give you the credit.

What happens when credit is refused?

If you are refused credit, then it means you didn’t meet the particular lender’s qualifying criteria and there could be several reasons for this. Examples of things that might generally mark your score down include missing payments for previous (and current) credit agreements, defaulting on credit agreements, and making reduced payments to creditors. 

Your score is probably also marked down if you’ve ever needed a debt solution of any kind such as an Individual Voluntary Arrangement (IVA) and bankruptcy, and also if you’ve made lower payments than previously agreed into a Debt Management Plan. Another reason for a lower credit score could be that incorrect information is being held on your credit report/file.

Is having a low credit score a bad thing?

Having a low credit rating needn’t be a problem, if you can budget well from month to month and manage without having to take out new credit any more. As part of our service to all PayPlan clients, we always make a regular detailed assessment of income and expenditure.  During this assessment we are often able to find areas in which we can help our clients save money without it affecting their lifestyle too much (if at all).

We do this because it’s easier to make debt solution proposals to creditors if they can see that you’re budgeting carefully.  And while making lower repayments than originally agreed to creditors is likely to affect your credit rating, if you keep to your affordable budget then you shouldn’t need to apply for new credit anyway.

Will a debt solution affect your credit rating?

A deviation from the original credit agreement, such as missing a repayment or making a reduced repayment, will be registered by the credit reference agencies.  This in itself will undoubtedly affect your credit score adversely if you subsequently apply for new credit.

Most people may well have, by the time they implement a debt solution such as a DMP or an IVA, already deviated from the original credit agreement in at least one of these ways, which means that starting a debt solution that offers creditors a reduced payment will continue to adversely affect your credit score if a lender were to subsequently make a credit check on you.

At PayPlan, we think it’s more important to manage your debts with a debt solution that really can help you out of debt – and we always try to build in an affordable budget for you to give you the very best chance of sustaining your debt repayments for as long as you need to.

A credit rating is repairable

Don’t forget that your credit rating can be repaired over time if you can manage your debts.  It may take some time, but your credit score will increase if you keep your creditors up-to-date with correct personal information, keep making regular debt repayments, and then eventually pay off your debts.

PayPlan can help you

Call us for free advice on credit scoring and debt solutions 0800 316 1833, or if our friendly advisers are busy just fill in our Debt Help Form  so we can call you back.