When 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. 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 Judgment (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 repossess 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 at 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 an individual’s credit file for up to 10 years and will have a significant impact on their ability to obtain credit at 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 has 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.
A credit rating is a credit score that indicates, among other things, how high the risk is that you do not pay your bills on time. A good credit rating is therefore important if, for example, you want to order products on credit. You cannot turn a negative rating into something positive at the touch of a button, but you can influence your credit rating. Five tips!
1. Know your credit rating
First of all, you need to know where you stand and what your credit rating is now. You can view your own details by requesting a free credit report. As a result, you know which parts you can profile yourself on and which parts require improvement.
2. Deposit your annual accounts on time with the Chamber of Commerce
Annual accounts provide insight into the financial situation of your company and are therefore an important source of information for estimating debtor risks. The earlier you provide your figures, the sooner your credit rating is based on current data. You do not have to e-mail your annual accounts separately which is automatically delivered to us via the Chamber of Commerce.
3. Pay on time and check open items on disputes
It receives payment experiences from suppliers. These experiences are taken into account in the credit rating – and weigh relatively heavily. It is therefore important to pay your bills on time. In addition, make sure that disputes are clearly marked with your supplier and are passed on in order to prevent incorrect display. If disputes are not known, they can have a negative impact on your credit rating.
4. Ensure healthy ratios
Your credit score is largely determined by a financially healthy balance sheet. When your annual figures are available, your credits score will, among other things, consider your solvency ratio, i.e. the ratio between equity and total assets. If companies see a lot of debts on your balance sheet, they are less inclined to grant credit. In addition, your liquidity ratios are important. These provide insight into whether your company can meet short-term obligations.
Securing the capital of operating companies in the holding company is naturally fine. However, it is important to realize that the financial position of the operating company is being weakened. They assess per entity – and negative equity or working capital in an operating company or bad financial ratios (see the previous point) can therefore negatively affect the credit rating of that operating company.