Is my Past affecting Future Credit Applications?

guarantor loanWhen you apply for an ‘item of credit’, whether that’s a credit card, a loan or a mortgage it’s highly likely that you will be the subject of a credit search. The lender or provider will use the results of your credit search in order to make a decision on the suitability of the applicant based on their past repayment behavior, otherwise known as their ‘credit history’.

In today’s world the lowest rate credit is reserved for those with immaculate credit history, therefore any missed payments or defaults are likely to result in the application being declined. This poses the scenario;

‘For the past 5 years I’ve kept up with all my repayments immaculately however before then I had a small financial crisis, will this affect my future credit applications?’ The answer to this will be dependent on the extent of your financial crisis. Here are the facts:

A missed payment is arguably the least significant piece of bad credit to have on your file. A missed payment does exactly what it says on the tin; when a debtor misses a payment the provider will usually give them a chance to make up the arrears. If the applicant fails to do so when prompted then the provider will report this to credit reference agencies (CRA) as a missed payment. Missed payments will stay on your file for 6 years meaning there is a chance they will affect your application, the effect they have will be fairly insignificant.

If a debtor consistently fails to make payments on a credit commitment or fails to contact providers for a prolonged period of time, then it’s likely that the provider will default the account. A default is more serious than missed payments in terms of the effect it will have on your credit score, therefore it will have a more significant effect on your chances of being approved for credit in the future. Just like missed payments, defaults will stay on your credit file for 6 years.

County Court Judgement (CCJs) are the next step for a lender if they have received no communication or payment having already defaulted the account. A CCJ is the last port of call for a provider and it involves taking the debtor to court in order to collect the arrears of the account. There are a number of routes the court may go down in order to collect the debt; if the debt is secured they may repossesses the debtors home, if it is unsecured they may put a charge on the property. Once again a CCJ will stay on a credit file for 6 years- it is likely that the debtor will struggle to obtain credit in this time.

Bankruptcy is slightly different in that it is imposed by the court usually on behalf of the individual themselves, i.e. it is usually the individual themselves that seeks bankruptcy if they feel there is no other option available. Having been declared bankrupt, the individual’s property (or any other asset) may be repossessed in order to repay their debt. Bankruptcy may stay on a n individuals credit file for up to 10 years, and will have a significant impact on their ability to obtain credit in that time.

So in answer to the initial question, it depends on the severity of the financial crisis that you have experienced in the past. While one or two missed payments shouldn’t affect your file significantly, CCJs, defaults and bankruptcy will.

The significance that each of these credit inaccuracies have on the loan application will be dependent on the item of credit that you are applying for. As I touched on above; mainstream lenders, banks and supermarkets have very strict lending criteria meaning that having any of these on your file in the past 5 years could mean your application fails their credit score criteria. If you are applying for a subprime loan such as a guarantor loan or a logbook loan, then lenders will be slightly more stringent.

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