The last few years have been financially tough for lots of people, many of whom have never had money worries before, and this has taken its toll on the credit profile of people looking to borrow.
Recent data from the Financial Conduct Authority (FCA) suggests that around 7.4 million adults in the UK are struggling to pay their bills, feeling “heavily burdened” by their outgoings.
Some lenders do rely on your credit score when assessing an initial loan application, and when your credit record is being reviewed, there are quite a few factors that a provider will take into consideration.
Therefore, if you’re trying to build a positive picture of your credit history, it’s worth knowing about the factors that can hold you back.
To help you do that, here are seven factors that can negatively impact your credit score, so you can be aware of the effect they could have and avoid them where possible:
1) Late or missed payments
When you take out credit, but miss a payment deadline by either paying late or not paying at all, these blips will be recorded on your credit history. Many providers will take this as a sign that you’ve struggled to make repayments in the past. Late or missed payments will stay on your record for six years.
2) Defaults
A default occurs when a credit provider closes your account due to a number of missed payments, typically over three to six months. A default will remain on your credit history for six years before being removed.
3) County court judgments (CCJs)
If a credit or loan provider believes that you cannot repay the amount you owe, they can escalate this to the courts by applying for a county court judgment (CCJ) against you.
If successful, you’ll have to pay the amount back in full or instalments, but will also get the opportunity to dispute the decision.
A CCJ will remain on your credit record for six years if it’s added to the Register of Judgments, Orders and Fines, but it won’t be added if you pay within a month or are successful in disputing the decision.
4) Overuse of credit
When a lender reviews your credit history, it’s looking for any signs that indicate you might be a risky borrower. If you regularly max out your credit limits across your accounts without clearing the balances, your credit report will show you are regularly using a high percentage of your available credit.
Lenders can interpret this as you being dependent on borrowing and a risky prospect.
5) Applying for credit in a short period
Another warning sign for a lender is if you have made a series of credit applications in a short period of time. When you apply for credit, a hard check is carried out and recorded on your history, which is then visible to other lenders.
If you apply multiple times in quick succession, this could be seen as a sign that you’re struggling financially or are being denied credit elsewhere.
6) Having a short credit history
Credit and loan providers like to lend to customers who have a proven track record for responsibly managing their debt. This factor can work against you if you have a short credit history, as, even if you are a sensible borrower, you do not have the evidence to back this up.
If this is the case, it can be worth building up your credit record for a couple of years before applying for finance.
7) Not being present on the electoral roll
When you register to vote by joining the electoral roll, your details are recorded on your credit report. This makes it easier for lenders to confirm details like your name and address.
If you aren’t on the electoral roll, they cannot do this, so it may adversely affect your credit. This is a simple step, so if you haven’t already, do it now.
Building a positive relationship with your credit history
While there are a few factors that can negatively impact your credit, it’s important to remember that, whatever your situation, there will be steps you can take to improve things.
And, building a positive relationship with your credit is a great place to start.
Seeking out your own credit report can help you to get an idea of what your current situation is – you can do this by using a free service like Experian or Equifax, who supply reports to lenders.
From there, you can judge where you can improve and concentrate on building up a better score.
Options are available
Having a low credit score means you may be refused a mortgage by mainstream lenders, and while there are lenders who specialise in borrowers with poor credit, they may charge higher rates.
If you have a low credit score and are looking to borrow money now, there are lenders with products that cater to those who have had issues in the past and are building up their score.
For example, Atom Bank’s Near Prime mortgage range is designed to assist those with less-than-perfect credit as it doesn’t focus purely on a credit score when assessing an application, unlike a number of other lenders.
Ultimately, if you’d like to make sure you’re in the best position possible when it comes to applying for a loan, it’s worth taking stock of the financial factors that could hold you back so you can build a positive relationship with your credit.
Richard Harrison is head of mortgages at Atom Bank
