Debt and your Credit Score

When it comes to managing debt, understanding the impact it can have on your credit history is crucial.

In the UK, missed or defaulted payments on credit agreements can leave lasting marks on your credit score.

These negative entries can make it difficult to secure future credit, obtain favorable interest rates, or even rent a home.

The good news is that by taking proactive steps, you can work to improve your credit score and regain financial stability.

What is a credit score?

Your credit score is calculated by the three main credit reference agencies; Experian, Equifax and TransUnion.

Once it’s calculated, you are given a three-digit number based on your previous borrowing history and your current borrowing habits.

This is then attached to your credit file. This is what is looked at by lenders when you make a credit application and it will take into account things such as:

• Any unpaid debts
• How much credit you have available – i.e. if you have maxed your limits
• Your overall debt level
• If there are any defaults on any of your debts

For the most part, it will be the most recent of these details that lenders will be interested in.

However, your report will hold a record of all these details for a total of six years.

If there are any negatives on your report, this can be a red flag to lenders when making decisions on your credit applications.

This can result in being rejected or being charged higher interest rates as you will then be seen as a higher risk for borrowing money.

Who decides credit scores?

Credit reference agencies

Credit scores in the UK are determined by credit reference agencies. These agencies collect and analyse financial data to assess an individual’s creditworthiness and assign a credit score.

The main credit reference agencies in the UK are Equifax, Experian, and TransUnion (formerly Callcredit).

They gather information from various sources, including lenders, utility companies, and public records, to compile credit reports and calculate credit scores.

The credit rating provided by these agencies is an important factor considered by lenders when making decisions about loan approvals and interest rates.

What’s a good credit score?

How your score is rated is different across the board. Each company will have their own way of doing this which means it may look more favourable in some places than others.

But, as long as you have a good credit score with one of the three main reference agencies mentioned above, then you will be considered a good credit candidate by lenders.

A good score for each agency is calculated as follows:

• Equifax: anything above 660
• Experian: anything above 700
• TransUnion: anything above 720

It’s important to remember, however, that this does not guarantee that any credit application you make will be approved.

There are usually other factors taken into consideration when making the decision to lend to you and it will never be purely based on your score.

What details are on my credit report?

The information that is held on your credit report will differ depending on what reference agency it was generated by.

As such, it’s always best to check all of them to give yourself a better overall picture of your credit profile.

Generally, credit reports will hold the following details:

• Personal details such as your name, address, date of birth etc.
• A trail of any credit search done by any lenders during credit applications
• If you are on the electoral roll at your address and how many years you have been there
• Any defaults you have on any of your accounts
• How much you owe to any lenders
• Details of any joint accounts you have with anyone
• Any unpaid county court judgements (CCJs)
• A marker showing if you have been subject to bankruptcy or insolvency

Information about things such as your wages, student loans, council tax, or criminal record (if you have one) will not be held on your credit report.

However, in some cases, you may be asked for these details when applying for credit and they may be considered alongside the information on your report.

Will missed payments be visible on my credit history?

Yes, missed payments can be visible on your credit history. Lenders and credit reference agencies track your payment history and report any missed or late payments to your credit file.

When you fail to make payments on time, These entries will be visible in your credit history and can lower your credit score.

This can make it more difficult to be accepted for mortgages, loans, and other credit agreements.

This damaging information typically remains on your credit file for a period of six years, therefore it’s crucial to make payments on time and minimise the damage to your credit profile.

How will a poor credit history impact my financial life?

A poor credit history can have significant repercussions on your financial life. Here are four ways it can impact you:

Difficulty in obtaining loans and credit agreements

Lenders and financial institutions heavily rely on credit history to assess an individual’s creditworthiness.

A poor credit history indicates a higher risk to lenders, making it challenging for you to secure loans, credit cards, or favourable interest rates.

You may be limited to high-interest loans or be required to provide collateral to mitigate the lender’s risk.

Higher interest rates

If you manage to secure credit with a poor credit history, you are likely to face higher interest rates.

Lenders may consider you a high-risk borrower, and as a result, they will charge you more to compensate for the increased probability of default.

This can significantly increase the overall cost of borrowing and make it harder to pay off debts.

Limited housing options

When applying for rental properties, landlords and property management companies often conduct credit checks to assess your financial responsibility.

A poor credit history can make it challenging to secure a desirable rental property as landlords may perceive you as a risk.

Additionally, some landlords may require a higher security deposit or co-signer if your credit history is unfavourable.

Impact on employment opportunities

Certain employers, particularly those in financial services or positions involving fiduciary responsibilities, may review credit reports as part of their hiring process.

A poor credit history can negatively impact your chances of getting hired or being considered for promotions, as it may raise concerns about your financial responsibility or trustworthiness.

How can I improve my credit score?

If your credit score is low, there are things you can do to build this up. We’ve laid some of these out for you below:

Check credit files for mistakes

This is one of the most important things to check for on your credit report. If even just a small detail is wrong, your score can be impacted, so make sure you check regularly that all your details are correct.

Don’t get caught out by fraud

Now you’ve checked all your details are correct, it’s time to check for any bank accounts, credit accounts, or credit applications that could be fraudulent.

If you notice anything that you either didn’t apply for or is incorrect, flag this not only to the company in question but to the credit reference agency as well to have it removed.

Make your payments on time

Now, this one may seem like an obvious one. But paying your bills on time is one of the best ways to show to lenders that you can be responsible with your money and pay back borrowed money.

Whether it’s utility bills or mobile phone contracts, any time you miss payments on a credit account, a red flag will appear on your credit file. Put simply, if you borrow money from a creditor, always ensure you repay it on time and in full.

Don’t exceed your credit limit

Understandably, you usually take on credit to use it, but a great way to help boost your score is not to max out any limits you have, such as a credit card.

The less available credit you use, the more this goes in your favour when it comes to future lenders, which will ultimately improve your credit score.

Clear what debt you can

Paying off your debts can help protect your credit profile while you work towards improving your financial situation. Two common debt solutions in the UK that can provide credit protection are Individual Voluntary Arrangements (IVAs) and Debt Management Plans (DMPs).

Individual Voluntary Arrangement (IVA)

An IVA is a formal agreement between you and your creditors to repay a portion of your debts over an extended period, usually five to six years.

With an IVA, you make affordable monthly payments based on your income and expenses, and the remaining debt is typically written off at the end of the arrangement.

During the IVA, your creditors are legally bound to stop taking legal action against you, and the interest and charges on any credit agreement included in the arrangement will be frozen.

While an IVA will have an impact on your credit score initially, it shows your commitment to repay your debts and can protect you from further negative credit implications.

Debt Management Plan (DMP)

A DMP is an informal agreement between you and your creditors to repay your debts at a reduced monthly payment rate.

In a DMP, a credit counseling agency negotiates with your creditors on your behalf to reduce or freeze interest rates and work out an affordable repayment plan.

While like an IVA, a DMP may have an impact on your credit score, it too demonstrates your willingness to repay what you owe and will have a positive impact on your credit in the long-run.

Where can I get help dealing with debt and missed payments?

Facing money troubles can stress you out, leaving you feeling lost and unsure about what to do next. But there are ways to help you break free from your debt problems.

At Talk About Debt, our advisors are here to clear things up and help you find a debt relief option that fits around your unique financial circumstances.

We’ve helped thousands of people just like you bounce back from unaffordable debt. So, get in touch with us today and start your journey towards a worry-free financial future.