You begin to get a bad credit rating when you fail to repay borrowings in accordance with the agreed terms and conditions. If you don’t make your repayments on full and on time, the price you pay is deterioration of your credit worthiness or to put it another way you acquire a reputation for ‘bad credit’. The next time you try to borrow money you will find that you will pay a higher interest rate or you won’t be able to borrow as much as you want to or you may not be able to find any loan provider who is willing to lend money to you. The lesson then is to pay back what you owe in full and on time. Don’t be late and do talk in advance with your loan provider if you anticipate that you may not be able to make a forthcoming repayment. You may even be able to agree a solution with your creditor that will not adversely affect your credit rating.
If you have already entered into a payment ‘arrangement’ with your creditors, chances are that your credit rating has already been adversely affected. You may have found yourself to be insolvent and forced to enter into an Individual Voluntary Arrangement (IVA) or even Bankruptcy or you may have had to go into a Debt Management Plan (DMP). Make no mistake, if you have adopted any of these solutions, your credit worthiness has already been damaged and your credit status will continue to be adversely affected for a considerable period of time.
Acknowledging that you are unable to pay your debts as they fall due and that you are or may be insolvent triggers the posting of credit defaults on your credit files. Creditors quickly become aware that you are and will continue to be unable to repay all of your debts to them and in the case of a DMP, while you may be able to repay your debts in full given enough time, your creditors will have to wait for a long time before they get all of their money back.
To trigger these defaults on your credit files, creditors use the services of credit reference agencies such as Experian, Equifax and Callcredit. The business of these agencies is to keep and maintain records of the repayment performance of borrowers and to sell this information to any interested party, provided they have a consumer credit license. Thus banks, mortgage providers, HP providers, credit card providers and even trading creditors can access your financial records in regard to borrowings. If you have a good credit history, then these records can facilitate your further borrowing at preferential rates. The converse is also true. A poor credit history will increase the cost of borrowing or even make it impossible. Access to and publication of such personal financial data relating to insolvent individuals is not prohibited by the Data Protection Act. For a small fee you or any private individual can obtain his or her own credit file and, in certain instances, a private individual can access the credit file of another individual such as when the two individuals concerned are co-habiting or even just living in the same house.
When you default in repaying any of your borrowings, creditors can create records of your failure. They do this by registering a default on the relevant account and provide the relevant information to the credit reference agencies. Even before an IVA, DMP or Bankruptcy process commences, some of your creditors may already have registered such a default where you have failed to comply with the terms and conditions of credit agreements, principally when you fail to make contractual repayments as they fall due. Such records are also accessible by the parties mentioned above.
In an IVA and in Bankruptcy, defaults remain on your credit file for six years from their date of registration. In a DMP they can remain on the file up to six years after the debt has been repaid in full. In an IVA of five years duration, borrowers can expect the default to be removed from their credit file about one year after completion of the IVA, assuming the defaults were registered around the time the IVA commenced. In Bankruptcy, the defaults will usually be removed about five years after discharge from bankruptcy which nowadays usually lasts one year in the UK. If you were to be in a DMP for say eight years, defaults could be recorded on your credit files for a further six years, making in this example a damaged credit rating lasting for fourteen years.
A standard condition of an IVA is that the debtor does not acquire any credit or enter into any credit agreement without the express permission of the supervisor, who in turn may have to obtain the express permission of creditors. There are usually some practical exceptions to this, which are anticipated and detailed in the IVA proposal. For example, the debtor may be permitted to incur credit in regard to some utilities such as water charges, electricity, gas or telephone but a monetary ceiling is normally imposed on such items of expenditure e.g. no more than £500 credit may be incurred in respect of such items. Maintaining a current account, provided it has no overdraft facility, is also usually allowed. A debtor will also be allowed to continue servicing secured borrowings such as a mortgage or car HP. The credit file will record how such credit activities are carried out. It is important to maintain payments in respect of all such forms of credit allowed by the IVA so that a good track record on such credit would be viewed positively by creditors when the IVA is complete.
In considering any request for credit facilities following the successful completion of an IVA, creditors will usually check on the debtor’s credit history via the credit files. Credit may be refused by some lenders if the credit file still carries default records. However, six years from the dates of the defaults, the credit reference agencies should automatically update the credit files and remove all references to defaults. If this has not been done, the debtor can request the removal of such default references. If creditors refuse or fail to do so and in the absence of a satisfactory response from them, the debtor can invoke their complaints procedures to deal with the matter and so begin to repair a damaged credit rating.