What causes a bad credit history?

5 April2011

Having a poor credit history can get in the way of a lot of things - including getting a bank account.

How?

Before your bank approves your application, they`ll want to know how you`ve handled your money in the past. If your credit rating isn`t as good as it could be, the bank may be cautious when it comes to accepting your application, as you may be seen as a `risk`.

That`s just one reason why it`s so important to make sure your credit rating is as healthy as it can be. So, if you think your credit rating could be improved, you should look at doing this right away; but before you do, it`s important to understand what might have caused it - so you can avoid making the same mistakes again in the future.

Making late payments

If you fail to make debt repayments on time, this could have an effect on your credit score. Your payment history is an important factor in your overall credit history, so regularly paying late won`t help your credit score at all.

Missing payments completely

If you fail to make debt repayments completely, as well as facing potential penalty charges, you may face more serious consequences. Missing payments could well mean that you`re unable to afford them - and that your financial issues are getting worse.

Having a debt written off

If you are unable to repay debt, it could be written off - and this will be recorded on your credit history. This only happens when your creditor believes you`re not going to repay the money you`ve borrowed. Potential future lenders will see that you`ve been unable to repay a debt and may base their decision on any applications for credit you make on this.

Entering certain debt solutions

Certain debt solutions - despite helping you to clear your debt - will have an impact on your credit history, as it shows that you weren`t able to keep up with your repayments as you had originally agreed to. An IVA (Individual Voluntary Arrangement), for example, is a form of insolvency and will be recorded on your credit history for six years from the day it begins. This can affect the cost and/or availability of future credit for this time.

Having your home repossessed

If you`re unable to maintain payments to your mortgage your home may be repossessed. This (along with the payments you`ve missed) will be recorded on your credit history for potential future lenders to see - which may make being accepted for your next mortgage more difficult.

County Court Judgments

When your creditor doesn`t think they`ll get their money back from you, they may turn to the County Court.

If you are unable to clear your arrears, you may be asked to attend court. Here, you may be given a County Court Judgment (CCJ), which will detail a payment plan for you to follow.

If you`ve been issued with a CCJ, this shows that a lender has had to turn to the court to recover their money. The CCJ will remain on your report for six years.

Having a high level of debt

Part of your credit score is measured by your use of credit. So, if you`ve borrowed money using a credit card and you`ve got a high balance (relative to the credit limit you`ve been granted), this means your `credit utilisation` is high - that you`ve almost `maxed out` your card.

Remember that a credit limit is a limit - it`s the maximum you`re allowed to borrow.

Making several applications for credit at one time

If you apply for credit and you have your application rejected, it can be all too easy to enter a `spiral` of rejection.

This is basically when you make an application for credit and it gets rejected, so you apply elsewhere... and you get rejected again.

When potential lenders carry out a credit search, they`ll leave what`s known as a `footprint`. So, when you make application after application, potential lenders can see that there have been multiple searches over a short space of time.

This may look as though no-one is willing to lend money to you, and that you`re desperate for credit - something that could go against you when it comes to a lender`s final decision.

Remember - your credit rating can be a crucial factor when you`re applying for any kind of financial product, from a bank account to a loan. So take the time to check it and make sure everything is correct. If you find any mistakes, you can have them corrected - if you don`t, it could make all the difference between `yes` and `no`.

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