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.
A 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 noddle.co.uk. 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.