credit scores

How Debt Affects Your Credit Score

How Debt Affects Your Credit Score

Anyone with debt will be able to tell you how debt affects their everyday life – their monthly outgoings, their expendable income, the organisation of their money, their social life, their food habits, the way they dress… even their mental health and wellbeing. What they may not be able to tell you however, is how it affects their credit score. 

credit score is a number produced by credit reference agencies and used by lenders to determine whether or not they want to lend to you. There are various factors that are taken into account to produce the score (different factors for each credit reference agency, in fact!), and one of them is debt.

Does having Debt Affect Your Credit Score?

This may mean that those who are most in need of a bit of extra cash, may actually find it more difficult to borrow more money. While this may not make sense at first, the system is designed to help avoid those who are in financial difficulty borrowing more than they are able to comfortably afford to pay back.

If you believe that your debt could be negatively affecting your credit score, we really recommend It’s a fast and free way to access your Callcredit credit score, and we also highly rate their ‘Noddle Improve’ service. This gives you a bit more of a breakdown of what is affecting your credit score – for better or worse. You can then see the major reasons as to why you may have a low credit score – most of them being either directly or indirectly related to debt:

  • Defaulting on a credit agreement
  • A court judgment such as a bankruptcy or Individual Voluntary Arrangement (IVA)
  • Multiple missed payments

These negative factors will stay on your credit file for 6 years and have the biggest impact upon your score. It can make it very difficult to improve your credit score over time as well as making it harder to get access to the best rates for loans, mortgages and credit cards, or even gain access to any further lending at all.

Other slightly less major variables such as ‘high balances or being over your credit limit’ may result in a low-to-medium credit score. This is because lenders have a good reason to believe that you are already borrowing a lot of money from elsewhere, and the fact that you need to borrow even more shows financial difficulty. For the exact same reason, so does ‘multiple new credit searches’ and ‘opening multiple new accounts’.

If you try to make a load of different applications, with direct lenders or otherwise, it indicates that you’re getting declined by other lenders and/or in need of a lot of extra funds. Sadly, this means you need to be super selective with how many loans you apply for, which can make shopping around for a loan a bit tricky. Make sure you use lenders who use ‘soft searches’ during the initial assessment stages – that is a credit search which isn’t negatively taken into account on your credit score. It shows up on your credit score, but is invisible to lenders.

Why your credit score is effective

Noddle claim, however, that the influence of these medium-weight issues is likely to be much less than things like court judgements (CCJs), and probably won’t affect your score for such a long amount of time.

Other more minor alerts that Noddle Improve can highlight, that suggests that debt (or changes in debt) can negatively affect your credit score, include:

‘The balance on one or more of your accounts has increased’

‘One, or more, of your accounts is close to its credit limit’

If you are making use of all, or almost all, of the credit that you have available, or are needing to increase the amount of your credit limits, this can be seen as a sign of financial difficulty, and that you are struggling to balance the books. Noddle suggest that your score should begin to improve once you start to reduce you income-to-debt ratio, and clear the outstanding balances on your credit facilities, as it shows that you are not being overwhelmed by debt and are making payments successfully.

However, it’s probably worth noting that these factors are related just to Callcredit’s credit scoring system. However, there are other credit reference agencies out there, the major ones being Equifax and Experian. It seems, however, that debt is intrinsically linked to many of the major factors highlighted by this particular credit score engine, and varying levels of debt seem to carry different weights in how it affects your credit score. 

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How to Avoid Unplanned Overdraft Fees

How to Avoid Unplanned Overdraft Fees

We’ve all been there – your bank balance is running a little low and before you know it, you’ve gone over your account limit and you’re left with an unplanned overdraft. Whether it’s unforeseen circumstances, forgotten direct debits or simply overspending, it’s easy enough to find yourself overdrawn.

However, it’s not a habit you want to get into – with informal overdraft fees varying between banks, you can find yourself racking up some serious charges on your current account and may find it hard to break the cycle of debt.

But don’t panic. We’ve put together our top tips on how to keep on top of your spending and keeping a safe distance from any unplanned overdraft issues. 

Find Out Why You’re Overspending…

We’re all guilty of overspending from time to time, but it’s important to see if there’s a pattern with your financial behaviour. Maybe going over your overdraft is a one-off, or do you have payments leaving your account before you get paid, regularly leaving you in the red? Looking at the cause can really give you some insight into your shopping habits, as well as working out if you could be avoiding all those excess fees.

Avoid Unplanned Overdraft Fees, Speak to Your Bank

Speaking to your bank is an intimidating prospect, (probably on par with a visit to the dentist!) but there’s nothing to be scared of; the long term benefits of taking control of your immediate finances could be well worth it. From possibly refunding bank charges, setting up a new overdraft (or expanding your current limit) or giving your finances an MOT, your bank is there to help to keep you from making the same mistakes again and again. Take a deep breath and pick up the phone – you can do this!

Consider a Loan to Break the Cycle

Debt in the form of loans is not something to take on without some serious thought, and unplanned overdrafts are no different. It’s easy to fall into a pattern of going over your limit and getting charged by your bank, and with some banks charging astronomical fees for informal overdrafts, things can quickly spiral out of control. If you’re struggling to break the cycle, it might be worth taking out a loan to get out of the initial situation, allowing yourself the chance to get on top of your finances.

There’s an App For That

There’s an app for everything these days, and chances are your bank has one too. Having 24/7 access to your account information at the click of a button can really help you to monitor your finances and not only that, many banks now offer a service to notify you when, for example, you’re close to going over your permitted balance. Not the most fun text to receive, but helpful nonetheless.

Give Yourself a Budget

So you’ve identified where your money’s going (and the damage it’s doing), but what now? A budget, of course – who doesn’t like writing a list? Once you’ve worked out necessary payments, you can work out a budget that keeps you up to date and out of the red. It might not be the most thrilling task, but by getting into the habit of tracking every last penny in your account, you’re less likely to end up getting into any more problems with your overdraft.

Give cash a try 

Nothing helps you keep within your budget like using cash. Try taking out the amount of money you can afford to spend in a week and limiting yourself strictly to that amount. It can really open your eyes to where you might be overspending and racking up bank costs. Also, as a last resort, there is the option of a loan, in an emergency. A payday or short term loan can be life saving in the right circumstances.