Imagine your car conks out and you do not have money to have it repaired. When you borrow money from a direct lender, you are told that your credit score is poor and hence you will get money at a high interest rate. It may be shocking news. Online lenders do not tell you about the credit reference agency they consulted to determine your credit score.
It is not surprising that you were under the impression that your credit rating was excellent. Well, if you did not make a default, why your score was less-than-perfect. Several reasons account for impaired credit standing such as a missed repayment, credit utilisation ratio, the length of credit, credit mix and credit inquiries. A credit score informs of your creditworthiness that builds up after taking into account five factors mentioned before.
|Credit utilisation ratio||30%|
|Length of credit||15%|
If any of these factors has issues, your score will plummet. Having an excellent credit rating means you have not made any default, your credit utilisation ratio is not over 30%, credit inquiries are as minimal as possible, and the length of credit is long enough to assess your reliability. However, you may have a low score even if your report does not show any issue with these factors.
The entire record in your credit report is maintained by credit reference agencies. They may record an erroneous information, for instance, a default that you have not made or a default may stay unsettled even if you have cleared dues. Therefore, you should take a look at your credit file at least once a year to conform that it does not consist of a default that you do not recognise. If you find any error, you should request the credit bureau to fix it. It will take 30 days to get it off your file.
The significant reason for a poor credit quality is missed repayments that stay on your credit file for seven years from the date of default whether or not you have paid off the debt.
Take a look at the following table:
|Things that can pull your score||How long will they stay on your report?|
|Charge-offs||180 days + 7 years after the first missed repayment|
|Bankruptcy||10 years from the date when you file it|
|Credit inquiries||2 years|
|Debt settlement||7 years after the final payment|
|Defaulted student loans||7 years from the date of delinquency|
|Late payments||Payments late with 30 plus days are reported and appear for 7 years|
|Positive payment history||10 years|
|Paid loans||10 years|
|Paid CCJ||7 years from judgment filing date|
What should you do when you have a bad credit?
A bad credit score can whittle down your options of getting a loan at competitive interest rates. A default on your report means you will not be able to get the best deal until next seven years. Therefore, make sure that you do not fall behind repayments. If you have bad credit, you should take steps to improve it.
If you look at five categories used to calculate a credit score, you will find that both payment history and credit utilisation ratio amount to two-third of your total credit rating. Both of them play a big role to have a good credit score. You will have an impaired creditworthiness due to either poor payment history or high credit utilisation ratio.
To improve your credit score, you should be responsible with your money. Try to pay all your credit bills, loans, mortgage instalments and utility expenses on time. If you have been juggling with multiple debts, you should emphasise settlement of big loans with high interest rates. You should consult your lender to know any other payment alternative so that you can get rid of your debt as much as possible.
You should take out 12 month loans with bad credit instead of payday loans. These instalment loans also come with no guarantor feature, but unlike payday loans, they allow you to repay your debt in equal monthly instalments. If you continue to make each instalment on time, your score will go up. If your credit score is less-than poor and you need money, you should take out instalment loans. They will be far easier to pay off your debt.
The later you pay off, the worse your score will be
If you have missed any repayment, you should not be sluggish. Late payments can stay on your credit file for maximum seven years, but it boils down to how many days late you are. If you pay off your debt within 30 days from the date of default, the lender will not inform to credit bureaus. However, you will have to pay late payment fees. If you settle your dues after 30 days from the date of default, it will affect your score for up to two years, and if it continues for more than 90 days, your score will be affected for next seven years. Therefore, you should be very careful with your repayment history.
The bottom line
A default can show up on your credit file for seven years. When you take out a loan, make sure that you do not fall behind repayments. Otherwise, you will not be able to get the best deal unless the default is removed from your credit file.