How to avoid damaging your credit rating
Every time you miss a loan repayment or skip paying a credit card bill, your credit rating is adversely affected. Therefore, in the long run, it pays to keep on top of your debts, writes Charlie Weston
THERE has been a surge in the number of people with debt problems, forcing many consumers to miss repayments and get into arrears on mortgages and other loans.
All of this is impacting on the credit ratings of householders. Missing repayments on a credit card, forgetting to transfer money to pay for your hire-purchase car, or skipping a loan payment could mean you end up with a bad credit rating.
Financial institutions report your record every month in repaying your creditors to credit reference agency, the Irish Credit Bureau (ICB). Information on individual loan accounts and judgments are also kept by credit agencies Experian Ireland and BusinessPro.
The ICB is the largest credit reference agency in the State and is owned by financial institutions.
More than 80 lenders send information about borrowers and their loan repayments to the ICB, which holds an individual credit report for each borrower on its database.
Each credit report has details of loans that the consumer has taken out, listing repayments made or missed on each loan. It also outlines loans that were settled for less than the individual owed and any legal action by the lender against that consumer.
When you sign up for a mortgage, loan, car finance (hire-purchase agreement), credit card, overdraft or make any loan application you give permission to your lender to send information about your repayments to a credit reference agency, such as the ICB.
This information forms your credit history.
It typically shows:
- Your name, date of birth and address.
- Names of lenders and account numbers of any loans you currently have or that have been closed within the last five years.
- A history of all repayments made or missed for each month on each loan, including any loans or credit cards you did not pay off completely.
- A score based on your credit history called your credit bureau score.
- A record of any legal action your lender took against you.
If you missed repayments, failed to clear a loan or credit card or settled a loan for less than you owed, it will show up on your credit history for five years after the debt is closed. This may result in you being refused other forms of credit.
However, Frank Conway of the Irish Mortgage Corporation and debt advisory firm CredyCare, said that those who missed their repayments by a few days should not end up with a bad credit rating.
"The idea that not paying exactly on the due date causes a bad credit history is wrong. Banks give a 'grace period'. This means that even if you pay your monthly payment a few days passed the due date, it will not affect your credit history."
This is because although ICB members are supposed to report any and all difficulties they experience with an individual, in practice most (although not all) will wait a couple of weeks before reporting to allow the customer to rectify the problem. He added that some consumers feel that when they are late with a payment they will suddenly be classed as a "bad customer" and are then reluctant to contact their lender.
If you are falling behind with repayments, or fear that you will, the best course of action is to contact your lender and explain your situation.
You can avoid the burden of financial stress if you are able to come to a new repayment arrangement with your lender. Often agreeing a new repayment schedule will not impact on your credit record, Mr Conway added. But if you do miss payments, then the consequences for your credit record are serious.
"If you miss repayments, fail to clear a loan or credit card or settle a loan for less than you owed, it will show up on your credit history for five years after the loan is closed," warns the National Consumer Agency, which has taken over the consumer financial information function of the Financial Regulator.
"This may result in you being refused another loan, even if you have the income to pay for it. Your credit record gives a full picture of your history."
A damaged credit history may mean you find it hard to get accepted for a loan or a mortgage in the future. This could mean a young person who misses a lot of repayments on a credit card may not be approved for a mortgage a few years later.