We reveal why having a perfect credit history can sometimes work against you...
Which of these groups do you think the banks or credit card companies like most?
Mr Immaculate Credit Rating, who’s never missed a payment and repaid every penny owed.
Mrs Worry About Her Credit Rating, who missed a few payments a couple of years ago and still obsesses that this will make her less attractive to lenders.
Mr Never Had Credit, who might struggle later in life to get access to any credit at all.
Or Miss Debt, suffering from an overwhelming debt problem, having to wait at least six years before she can get credit again.
The answer is that the banks like all of them, and have products befitting all of them, because they can profit from all of them, all in different ways.
Miss Debt might have bad credit or just be over her second IVA, but the banks will give her the ‘bad credit’ credit card and charge her eye-watering interest, and she’ll pay it because she feels she can’t survive without credit cards.
Mr Never’s never had credit but the bank will say that the best thing is to build a credit history and start an overdraft. Even if he never uses it the bank can still charge him each month just for upgrading his account.
Mrs Worried is concerned about those missed payments a few years ago. So are the banks - worried enough to lend her as much as she likes (but charges her that bit more for it).
Mr Immaculate Credit? The banks aren’t that keen on someone with a spotless rating as they struggle to make as much profit from him.
However, what would happen to his immaculate credit rating if he lost his job? How about if they lend him some money and he takes out payment protection insurance? That makes sense; after all he wants to keep that rating pristine whatever happens…
Financial shock
The current credit rating system works on a number of factors. Your basic credit score is made up of your payments history, previous dealings with the lender(s), and the lenders’ own set criteria of their ‘perfect customer’.
This ‘perfect customer’ will differ from lender to lender and could (with some products) lead to Mr Immaculate being turned down for some products more readily than someone with a slightly ropey payments file will qualify for.
In essence a credit rating is a look at the past and a prediction how the customer will behave in the future.
But people with ‘perfect’ credit scores may have a financial shock at some point in the future, much the same as anyone else. Lenders may as well consult tarot cards or a crystal ball to see the potential financial future of borrowers.
From our own research we’ve found out that most people run into problem debt when they have an unforeseen financial shock such as redundancy, or a relationship breakdown.
There’s no credit rating system in the world that can predict what happens to the financial situation of these people after their own personal ‘financial crash’, and this applies to Mr Immaculate just as much as Miss Debt.
Will my credit rating be affected?
When they suggest a debt solution like an IVA or a DMP our Helpline counsellors are regularly asked by clients, battered by serious debt issues, “will my credit rating be affected?”. It’s shocking (but perhaps not surprising) that people would rather go without essentials than have a bad credit score.
This applies whether it’s Miss Debt or Mr Immaculate at the end of the phone and we sometimes find that people with an excellent credit history get into the biggest amount of debt (unsecured debts of £50,000+ are not uncommon).
The important thing to remember is this: The only time you should worry about your credit rating is when you want to borrow some money.
If you’re worried about your credit rating because you’ve borrowed money and now you can’t pay it back then just forget it. Your credit score will be lowered no matter what you do.
But you must do something; you must come to some arrangement to repay what you can reasonably afford even if it means you won’t be able to borrow money again for some time.
We almost never come across people who have actively borrowed money they had no intention of paying back. We have often recommended bankruptcy as a client’s quickest, easiest and cheapest option only to hear the client say, “No, I want to pay something back”.
People’s intent with paying back debt is, on the whole, good, but if they have problem debt and have decided to try and get more credit while they can, we’d strongly advise against it. In most cases borrowing more money just makes the problem worse further down the road.
Instead, we’d recommend that they speak to us or use our online advice tool Debt Remedy to find a solution to pay back what they owe. Doing this won’t affect their credit rating.