According to figures released by the Office for Budget Responsibility in March 2018, the average household’s debt-to-income ratio has been steadily increasing over the past few years and is set to reach 146% by 2023.
Unfortunately, this means the number of people missing payments, defaulting on loans and credit arrangements and receiving County Court Judgements (CCJs) is also increasing; in the third quarter of 2018, over 3,000 people were issued with CCJs as a result of not being able to pay their debts, a figure that is rising year-on-year.
CCJs missed payments and defaults can have a negative impact on your credit score and your chance to be approved for credit in the future. This doesn’t mean you won’t get approved if you apply for a loan, just that you’ll likely pay a higher interest rate and could be subject to restrictions by your lender.
Missed payments and defaults
What are they?
If you don’t make a payment to a lender on time, you are considered to have missed a payment, even if you make it at a later date and before your next payment date. If you missed a certain number of payments, you would go into default.
The number of payments you can miss before defaulting is dependent on your lender; for some, two missed payments means you are in default, for others it can be as many as six. Once you’re in default, your lender can take further steps to collect the money you owe them.
Once your account is in default, your lender will write to you, sending you a default notice that includes how much you owe them. You have two weeks to pay them the money owed. If you do, you, the default won’t be reported on your credit file.
How do they impact your credit score?
Defaults are recorded on your credit file as a note from your lender. Other lenders can see this note, and it will influence their decision as to whether to lend you money or not. If you do get approved for a loan, the interest rate may be higher than the representative APR, and you need to make sure you can make the monthly repayments or risk damaging your credit score further.
Missed payments and defaults stay on your credit file for six years; the older the missed payment or default, the less of an impact it has on your score or your ability to get credit. You do not have to have paid off your debt for the default notice to be removed from your credit file. At the same time, the notice is not removed if you pay your debt back before the six years are up.
While you can’t remove a default notice from your credit file you can mitigate the effect by including your own note explaining the circumstances and paying back any debt related to the default as quickly as possible.
CCJs
What are they?
CCJs is a County Court Order and are a legally binding court order, issued by a judge and requiring you to pay back your debt to a lender. They are usually issued following a default notice. The lender has to apply for a CCJ, notifying you of their intention.
When a request for a CCJ is filed, you will receive court papers and be required to respond within fourteen days. During this time, if you haven’t already, speak to a debt adviser, who may be able to negotiate a repayment plan with your lender, stopping a CCJ being issued.
How do they impact your credit score?
A CCJ will negatively impact your credit score and your chance to get credit in the future. It may be especially difficult to get approved for a mortgage. CCJs stay on your credit report for six years and are listed on the Register of Judgements, Orders and Fines, again for six years. The Register is a public document and can be seen by anyone, including potential employers.
If you pay off your debt within a month of the CCJ being issued, you can get it removed from your credit report and the public register. If you pay off your debts after the month is over, you can ask for the debt to be marked as ‘satisfied’ on your credit report. If you’re looking to borrow then you can search CCJ loans on Lending Expert.
To have the debt taken off your credit report or marked as satisfied, you will need to apply to the court, proving proof of payment.
Improving your credit score
As with defaults, the older the CCJ is, the less weight it will have with lenders as long as you have kept up repayments on other debts. You can also increase your chances of being approved for a loan by improving your credit score. You can do this by:
- Making sure you are registered on the electoral roll as lenders use this to check your identify and see that you have a long-term address as a sign of stability.
- Checking your credit report regularly, speaking to credit reference agencies and your lenders to correct any errors as soon as possible.
- Paying bills with credit agreements attached on time; these include mortgages, mobile phone bills, the internet, and credit and store cards.
- Paying down your debts rather than applying for new credit, especially if your debt to credit ratio is above 50%.
If you are struggling to manage your debts, talk to your lenders or free debt advice organisations such as Citizens Advice to arrange a repayment plan before you get to the point of missed payments, defaults, or CCJs.
