5 common Causes of bad credit
Banks and other financial institutions score each applicant they receive, this helps them to predict how risky the applicant is, work out how much interest to charge and possibly other measures. The problem is that many people don't pay much attention to one of the main influencer of the bank's scoring system, credit ratings.
If you find that you've been turned down for a credit card or loan application, it may well be because you have a bad credit rating. Here are the common causes of failed credit applications.
1. Not on the Electoral roll
This is a database of registered UK voters, when you fill in an application form, a lender will check the electoral roll to confirm the details you have provided.
If you're not on the electoral roll for the address you used to apply and can’t provide a previous address where you were registered on the electoral roll, some lenders will reject your application on this basis, those that don't will require you to provide proof of identity.
If you’re eligible to vote in the UK, the solution is to register; for details see Electoral commission
2. Thin or no credit history
If you've ever had a loan, credit card or other types of credit, it is likely that the lender shared data about it with credit references agencies. This data contains payment history and whether the debt was settled or defaulted. It becomes part of your credit history on which lending decisions of the future will partly depend.
The more you use credit services the more credit history you will gain, if you have never had credit of any sort in the UK, you'll have no credit history; for example if you've just turned 18 or just moved to the UK from another country.
If you're patient you might be able to build up your credit using a current account with an overdraft facility (ask your bank to be sure). If you need a credit card in the short term, speak to your bank; most will have starter credit cards for students or people new to credit. If you can’t get one from a bank, you can try bad credit credits or even prepaid cards.
3. Too many missed payments
Missed payments on credit cards, mortgages or other financial commitments can get added to your credit history, each will have a negative effect on your credit rating, if you have too many, they also increase your risk in the eyes of a potential new lender.
Missed payments put you at a disadvantage but they are not as bad as a default , some lenders might be willing to overlook them if you have shown improvement in your recent payment history.
4. A Recent bankruptcy, CCJ or IVA
What causes the most damage to a credit rating is failure to repay debt; the lender will report the default to credit reference agencies, on top of that they may take action against you in an effort to recover their money, this can lead to a County Court Judgement (CCJ), Individual Voluntary Arrangement (IVA) or a bankruptcy. Any of those would be damaging, let’s take a brief look at each one:
A creditor may apply for a County Court Judgement (CCJ) against you if you fail or refuse to pay what you owe them. You will receive documents detailing that someone has filed a claim against you, you must respond to the claims within the deadline otherwise the court will rule in favour of the creditor.
It’s possible to get the judgement cancelled but if a ruling goes against you and you’re unable to pay off the debt in 1 month, the CCJ will remain on your credit report for 6 years, and it is one of the bad signals that all lenders look out for.
The rules on CCJs are different for Scotland, read about Debt law in Scotland
An Individual Voluntary Arrangement is an arrangement between you and your creditors to re-organise, and in some cases right-off some of your debt in order to make it possible for you to pay, they’re arranged by an Insolvency Practitioner, who also oversees the entire process.
An IVA might make it easier to pay off your debt, but it also goes onto your credit report and remains there until 3 months after the IVA ends.
A Bankruptcy is a final resolution for cases where despite trying everything, the debtor is still unable to settle their debts. The debtor may apply to declare themselves bankrupt, an Insolvency Practitioner and the creditors can also apply.
A bankruptcy is in effect once the court issues a Bankruptcy Order, the debtors assets can be ceased and they will also have to follow Bankruptcy restrictions.
Although it usually takes 12 months to be discharged from a bankruptcy, the fact that you’ve been declared bankrupt will stay on your credit report for another 5 years (according to Experian) and any time you apply for credit (Loans, cards, hire-purchase etc), the lender will be able to see it.
5. Identity theft
If you’re unfortunate to have your personal information stolen, the criminals might acquire accumulate debt in your name by taking out loans or buying products on credit.
Once the creditor realises that no repayments are being made, they’ll try to contact you, but most likely the criminal would have registered with bogus contact details which means the creditor can’t get in touch with you, eventually they will report the missed payments and eventual default to Credit Reference Agencies, thereby damaging your credit.
If you don’t check your credit report regularly you may never find out until you apply for some form of credit at which point you might get informed that you have bad credit.
Thankfully, Credit Reference Agencies are aware of the problem of identity theft and if you notify them, they’ll work with you to remove the fraudulent activities from your credit report. You can start the process by getting your statutory copy of your credit report from all 3 UK Credit Reference Agencies: Experian, CallCredit and Equifax.
Now that you know the 5 most common causes of bad credit hopefully you’ll know what to lookout for, what to avoid and what steps to take to recover in case you already have a bad credit rating. For further reading see: DIY Credit repair.