Worried about how a debt solution could affect your credit rating?
If you have always made your payments on time, the thought of damaging your credit rating can make it difficult to consider a formal debt solution.
You may feel that keeping a good credit score means you are managing your finances successfully. However, a credit score does not always show how affordable your debts are or how much pressure the repayments place on your household.
You can have a good credit rating while:
- Using credit cards or an overdraft to pay for food and household bills
- Making minimum payments without bringing down the balances
- Moving debt between different credit cards
- Borrowing more because your income no longer covers your essential costs
- Having little or no money left after making your monthly repayments
If any of these situations sound familiar, protecting your credit rating may be keeping you in an unaffordable position.
What does your credit rating actually tell you?
Your credit rating reflects information held on your credit report, including how you have managed borrowing and whether you have made payments on time.
It does not fully measure your financial wellbeing.
Someone can make every payment on time and still struggle throughout the month. They may have a good credit score but no savings, little money for unexpected costs and credit card balances that are barely reducing.
Your credit rating can therefore appear healthy while your finances feel anything but healthy.
Credit utilisation may reveal more than your score
Credit utilisation measures how much of your available revolving credit you are currently using. This mainly applies to credit cards and overdrafts.
For example, if your credit card has a £2,000 limit and a balance of £1,800, your credit utilisation on that card is 90%.
Even if you have never missed a payment, using most of your available credit can suggest that you are becoming heavily reliant on borrowing.
Ask yourself:
- Are your credit cards or overdrafts regularly close to their limits?
- Are you making payments but seeing little reduction in what you owe?
- Are you relying on available credit to get through the month?
- If you could not borrow any more from today, could you still afford your household bills and existing debt repayments?
The answers to these questions may tell you more about your financial position than the number shown by a credit reference agency.
Is maintaining a good credit rating helping you?
A good credit rating can make it easier to access further borrowing. But if your current debts are already unaffordable, access to more credit may not improve your position.
It can allow the problem to continue for longer.
You might make minimum payments for several years while paying significant interest and reducing the balances very slowly. You could also end up borrowing again whenever an unexpected bill arrives.
In that situation, maintaining a good credit rating may come at a high price.
The more important question is whether your current repayments are affordable without sacrificing food, heating, housing costs or other essentials.
A debt solution will affect your credit rating
We will always be clear about this.
Formal debt solutions affect your credit rating and may make it difficult to obtain further credit. This is an important consequence that you should consider before making any decision.
However, the effect on your credit rating needs to be weighed against what could happen if you continue as you are.
If suitable for your circumstances, a formal debt solution could provide:
- One monthly payment based on what you can afford
- Interest and charges frozen
- Reduced contact from the companies included
- A clear route towards dealing with your unaffordable debt
- The potential for debt you cannot afford to repay to be written off
For some people, accepting an impact on their credit rating for a defined period may be more manageable than spending many more years making unaffordable payments without substantially reducing what they owe.
What could waiting another two years mean?
Our recent customer survey found that almost 25% of people waited two years or more before seeking help with unaffordable debt.
For someone eligible for a Trust Deed, which typically lasts four years, taking action when they first recognised the problem could mean they were already halfway through their solution by now.
A Trust Deed or any other alternative formal debt solution may not be right for everyone. However, getting advice sooner can help you understand your options and make an informed decision before interest, charges and unaffordable repayments continue for another two years.
Think about where your finances could be in four years
A Protected Trust Deed typically lasts for four years.
It can be helpful to compare two possible positions.
If you continue with your current payments, where are your balances likely to be in four years? How much interest will you have paid? Will you still need to use credit for everyday expenses?
If you choose a suitable debt solution, you could spend those four years making one affordable monthly payment and working towards a defined outcome.
Your credit rating may be affected, but your existing level of borrowing and credit utilisation could already affect how lenders view you. Continuing to borrow is not guaranteed to protect your access to affordable credit.
The right decision depends on your circumstances, what you can afford and what matters most to you.
You do not have to decide before speaking to us
Receiving debt advice does not commit you to a Trust Deed or any other solution.
We will look at your income, household costs and debts before explaining the options that may be available. We will also explain how each option could affect your credit rating, assets and monthly budget.
You can then decide whether any solution is right for you.
If concerns about your credit rating have stopped you from asking for help, speak to us before ruling anything out.
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Debt advice done your way.