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30…that’s how old I was on my last birthday. 5ft 7inches. That’s how tall I am. I could share other numbers with you, but what would they really tell you about me?
25…that’s the number of years our advisors have been helping people deal with their debts.
Over the years, we’ve spoken to lots of people who feel like having a good credit score is a sign that they’re a good person, and that by damaging their rating this somehow makes them a bad person.
We’re here to tell you that this simply isn’t true. At the end of the day, your credit score is a number in a database. Yes, a good credit report can help you achieve certain goals such as securing a mortgage, but it no more reflects who you are as a person than the numbers I shared with you above.
We’ve always believed in people over numbers, and we think you should do the same.
Firstly, a debt management plan (DMP) can be a great way to get back in control of your finances. It does this by reducing the payments on your debts to a manageable level. That said, this does mean that you’ll usually be repaying your debts for a longer period.
Although your creditors aren’t obliged to co-operate, in most cases they’ll freeze interest and charges on your debts once they know you’re on a DMP.
The DMP itself isn’t usually registered on your credit file, but the record for debts included in it will have a flag added to them. It indicates to anyone checking your credit file that the debt is being repaid through a DMP.
The bigger impact from being on a DMP is that you’re making reduced payments to each of your creditors. This could potentially lead to:
It’s almost certain that missed payments will be registered against you on a DMP and defaults are very likely. (CCJs are less likely but can still happen. When a creditor applies for a CCJ, it’s usually because they’re unhappy with the payments they’re receiving through the DMP.)
We believe that it’s more important to deal with your debts than worry about credit rating. For what it’s worth, your credit file is likely to have been affected by missed or late payments at the point your DMP was recommended.
It’s also important to remember that your credit report ‘heals’ with each payment that you make. So if you decide to get debt help, six years from now any markers that have been added to your report will start to drop off.
I’ve been asked in the past whether you should try and improve your credit rating while on a DMP, so you’ll be more creditworthy once the DMP is complete. My honest opinion is that it’s not worth stressing yourself out over.
When it comes to repairing your credit file through your DMP, consistency and transparency are your best friends. So:
If you do these two things, you’ll eventually start to look like a more attractive prospect to future lenders.
And a major benefit of being debt free is that you’ll feel better in yourself as well.
Once you’ve finished your DMP, there are steps you can take to improve your credit rating. Although it may sound bizarre, one of the ways to repair your credit rating after a DMP is to take out new credit.
Ideally, you’d need to spend a small amount of credit each month and repay it on time and in full, showing lenders you can be responsible with money.
But, if you’re worried about this approach, thankfully there are alternatives.
Loqbox not only helps you rebuild your credit score it also helps you build up savings at the same time.
Using your savvy budgeting skills, work out how much money you’d like to save each month between £20 and £500.
Next, take your monthly savings amount and times it by 12. This is how much your Loqbox is going to cost.
So, if you’re saving £20 your Loqbox will cost:
£20 x 12 = £240
Now, instead of buying your Loqbox outright you’ll be given interest-free credit to pay for it. Your monthly repayments will be equal to your saving commitment, which in our example is £20.
Every payment you make will be recorded on your credit file, showing lenders you’re responsible with money and can manage credit.
After 12 months your Loqbox will be paid for, and you’ll be able to unlock it, releasing all of your savings. If your situation changes during the 12 months and you’re not able to keep to your savings commitment, you can unlock your box at any time. There’s no charge or penalty for doing this, and you’ll get back all the money you’ve paid.
We don’t endorse Loqbox or receive any financial incentive from linking them, but we think their product could be a good idea for people coming out of debt.
Although we’ve talked about credit ratings, we haven’t spent any time considering what your credit rating is and how to get a copy of your credit report.
Credit reference agencies (CRAs) hold details about your financial accounts, and based on how you manage those accounts they give you a score.
If you manage your accounts well, such as by paying on time and staying within your agreed limits, the CRAs will reward you. If you don’t manage your credit effectively – say you miss a payment – they’ll take points away from you.
In the UK there are three CRAs (Experian, Equifax and Noddle) and each has its own scoring system and scale. So, for Experian you need a minimum of 881 out of a possible 999 points to get a ‘good’ rating. But for a ‘good’ rating with Equifax, you’ll need 420 out of a possible 700 points.
When it comes to being approved for credit, it’s the lenders who make their own decisions based on the information they think is important.
Just as each CRA scores you differently, the information on your file can be interpreted differently from one lender to the next; one company may decide you can’t be trusted to repay a phone contract, but others may be willing to offer you a credit card.
What starts as a small amount of manageable credit can all too easily snowball into something much bigger that’s harder to slow down or stop. And all too often, the catalyst for your debts snowballing is likely to be bad luck rather than being a bad person.
Our 2017 Personal Debt Statistics Yearbook reveals that 35% of our clients are struggling with debts because of unemployment and illness.
Your credit history only contains facts and figures about your financial accounts, over a period of six years and it’d be a pretty terrible tool to find out whether someone’s a decent person or not.
Instead of focusing your attention on a credit rating that doesn’t define your worth as a person, focus on paying off your debts. Always remember the brave steps you’ve taken, and how proud we are of the progress you’ve made and will continue to make.
Has being in debt ever affected your self-worth? Have you shied away from telling others how you feel, or felt judged for being in debt?
Have you had any experiences of your credit rating stopping you from doing something?
Do you know have any good strategies to cope with a damaged credit file? Let us know in the comments section.