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 are 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 as you progress through life.
One of the most common causes that can have a negative impact on your credit file is missing payments. The payments can be on anything; credit cards, car finance, loans and even 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 are higher than expected. If you miss more than one payment in a row, serious problems can occur. A potential lender will see these missed payments and you will be classed as high risk, which means you will get much higher interest rates or possibly be rejected for credit altogether.
If you have 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 they will be placed on your credit file. The Data Protection Registrar has stated that you should be 3 months behind on payments before an agreement is seen as a default, although this is not the law.
CCJ stands for County Court Judgement. 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 6 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, but 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 is settled, lenders will see any CCJs on your credit file as a negative entry and it can impact future credit requests.
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 you will 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.
This stands for Credit Industry Fraud Avoidance System, and any CIFAS entry on your file is bad. CIFAS registers different types of fraud, such as false names, stolen credit cards and false applications. When there is 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. One reason for this, for example, would 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 stands for Individual Voluntary Arrangement and is used by an individual to come to a deal with a lender to avoid declaring themselves bankrupt. An IVA is 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 3 to 5 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.
If you're not on the Electoral Roll at the address on the application, there is a high probability you will be rejected. This is because lenders like to have some traceability in the people they lend to. People often try to hide from the loan companies by taking themselves off the Electoral Role. This does not work and it will mean that companies are much less likely to lend to you.
If you're a tenant and frequently move house, it will start to impact your credit score. This is because lenders like to see stability in your life if they are 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 have been at your current address for less than 6 months, your score will be affected.
Employment is another area that lenders like to see stability. If you have been in a stable job for many years, you will 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 on 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 is a chance the lender will ask to see the last couple of months 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 (freelancers, artists, photographers, supply teachers, for example) it's worth including it in the application.
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 will 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.
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 have 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 Creditplus use to determine your eligibility for a car loan.
This will depend somewhat on circumstances, but if you have just moved to the UK the chances of you being accepted for credit at all are very slim. You may be able to get credit after a year, although the chances of getting a good rate will also 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.