Part 2: Causes

There are a number of ways that you can damage your credit profile. Some of them are obvious and some are not.

We're going to provide a comprehensive list of all of the causes that can negatively affect your credit rating. That way you should be able to diagnose what is affecting your own credit file. The list will also be useful for those who have little experience with credit, so you can keep poor credit issues at bay in the future.

Missing payments

One of the most common causes that can have a negative impact on your credit file is missing payments. These can be any payments, such as credit cards, car finance, loans and mortgages. Missing a payment is going to cause problems, even if you just miss the odd payment here or there. When you do get accepted for credit later you may find that the rates (APR) are higher than expected, and that if you miss more than one payment in a row, serious problems can occur. A potential lender will see these missed payments and you'll be classed as high risk, which means you'll get much higher interest rates or possibly be rejected for credit altogether.  No one wants to be refused credit, so this is a heads up on what may lower your rating.  There are online services out there that will help you to understand what is impacting your credit file, over at our credit resources page we have a link to a 30 day free trial with Experian a tool that clearly highlights what is causing your credit score to rise or fall.  

Defaults

If you've missed multiple payments on a credit agreement, it may result in a default. If you default on a credit agreement, the company that lent you the money will send the record of the default to the various credit agencies and these will be placed on your credit file. The Data Protection Registrar has stated that you should be three months behind on payments before an agreement is seen as a default, although this is not the law. 

CCJs (County Count Judgements)

CCJ stands for County Court Judgements. This is the term used when you have been taken to court for failure to pay back money you owe. Unfortunately CCJs will negatively affect your credit file and you'll struggle to borrow money from prime or near prime lenders. A CCJ will stay on your credit profile for six years and will seriously harm your ability to obtain credit.

If you pay the money owed within one month of the court order, you'll be able to remove the CCJ from your file. In order to do this, you'll need a Certificate of Satisfaction. If you pay the amount after one month, it will be shown on your file as settled (if the above certificate is issued) for six years. Even though it's settled, lenders will see any CCJs on your credit file as a negative entry and it can impact future credit requests.

Bankruptcy

If you become bankrupt, you'll struggle to obtain finance. Again, this information is kept on your file for 6 years by the credit agencies. There are, however, ways to get this removed. If your bankruptcy order is annulled or withdrawn, you can send a copy of the certificate that you'll have been issued to the credit agencies. If your bankruptcy order ends, you must send a copy of the discharge certificate, and the agencies will also update their files.

CIFAS (Credit Industry Fraud Avoidance System)

Any CIFAS entry on your credit file is a negative. CIFAS register different types of fraud, such as false names, stolen credit cards and false applications. When there's a CIFAS entry, it means lenders will take extra care to ensure that the application is genuine, though unfortunately sometimes the application will just be rejected, even if it's legitimate. As an example, one reason for this could be if your address has been used for fraudulent activity in the past. The Credit Referencing Agency should be written to, requesting all the details of a CIFAS entry if this is the case.

IVA (Individual Voluntary Arrangement)

An IVA is used by an individual to come to a deal with a lender to avoid declaring themselves bankrupt. It's a legally binding contract which stays on your file for six years. Essentially, they allow you to consolidate your debt into a single monthly payment. There are major benefits to an individual to enter an IVA as often they will be able to reduce their total amount of debt by up to 75%, leaving the individual to pay off the balance within three to five years. Lenders will not look at an IVA in a positive light, and individuals will struggle to obtain credit until this is removed from their credit file.

You aren't on the Electoral Roll

If you're not on the Electoral Roll at the address on the application, there's a high probability that you'll be rejected. This is because lenders like to have some traceability on the people they lend to. People often try to hide from the loan companies by taking themselves off the Electoral Roll. This doesn't work and it will mean that companies are much less likely to lend to you.

You have lived at your current address for less than three years

If you're a tenant and move house frequently, it'll start to impact your credit score. This is because lenders like to see stability if they're going to trust you with their money. Even if you have only moved a couple of times in the last few years, your credit rating will start to drop. If you're a home owner the impact will be lower. If you've been at your current address for less than six months, your score will be affected.

You have just started a new job

Employment is another area that lenders like to see stability. If you've been in a stable job for a number of years, you'll be looked at far more favourably than someone who changes their job every few months. Ideally, if you're changing jobs, you should hold off applying for credit for a few months. This is not such an issue if your salary is increasing. Any reasons you have for changing jobs should be noted and included in the application (such as freelance employment, transfer within same company or promotions). Having a job for a number of years, though, is what will give you the better score. There's a chance the lender will ask to see your last few pay slips as part of the application, so keep these somewhere handy. It goes without saying that bouts of unemployment can adversely affect your credit score.

If your profession requires you to move around and change jobs regularly (such as freelancers, artists or supply teachers), it's worth writing this down and including it in the application.

Income / Affordability

Whenever you make a finance application you'll be asked for your salary or monthly wage. Lenders need to know how much income you have each month as they'll calculate whether they think you're able to afford the re-payments. As a rough rule of thumb, as long as your loan repayments are under a quarter of your monthly wage, the lenders will be satisfied you can afford the loan. However, this will depend on any other fixed costs you have, such as other loans and mortgages. Lenders will also want to ensure the source you get the income from is steady and the amount you earn is consistent. Two of the most popular pages on our website is the car loan affordability tool.

Too many credit applications

Making an application every few months shouldn’t impact your credit score too badly, but anything more will begin to reduce your score. If you've had a number of applications refused, try not to make any new ones for six months. This gives space before applying again and room for you to review your credit file and find ways to improve it.

Remember - EVERY application and search on your file is recorded. The exception being ‘soft searches’, which is what we use to determine your eligibility for a car loan.

Not lived in the UK long enough

This will depend somewhat on circumstances, but if you've just moved to the UK the chances of being accepted for credit are very slim. You may be able to get credit after a year, although the chances of getting a good rate will be very slim.

How can I fix my credit rating?

Now that you know what’s negatively affecting your credit rating, you can start taking steps to repair it. We have listed some of our steps over at our Credit Clinic Treatment page, or you can visit our Resources page where we list a large number of non-profit debt advice charities and companies who can provide free, impartial advice.