How debt affects your credit score

Your credit score is closely linked to how you manage debt. Understanding this link gives you the power to make great choices. On this page, we explain how your score works and how you can rebuild it over time. We want to help you protect your credit and plan a healthy financial future.

What is a credit file?

A credit file is a record kept by a credit reporting agency. It shows all your borrowing history. Lenders check this file when you ask to borrow money because it helps them decide if they should lend to you.

Checking your score

You can easily ask for a copy of your credit file. The quickest way is online through companies like Equifax, Experian or Transunion. You can also ask by phone or post. They will just need your full name, date of birth and any addresses you have lived at over the last six years.

Why is my credit rating important?

When you apply for credit – whether it’s a credit card or car finance – the potential lender will take a look at your credit report. This will show them your current credit rating and whether you could be considered a risk or not.

Maintaining a good rating and ensuring your report is clear of any negatives – such as defaults or high levels of outstanding or late debt – is the goal. Remember, it’s never too late to fix a low credit rating.

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What happens if a lender says no?

If a company refuses to give you credit, it just means you did not meet their specific criteria. This often happens if you have missed payments, paid less than you agreed or needed a debt solution in the past. Sometimes it can even happen because your credit file has the wrong details on it.

What brings your score down?

A few different things can lower your credit rating. Most of these marks will stay on your report for six years.

• Late payments: Paying late is a clear warning sign to lenders.
• Defaults: Your lender might issue a default if you fall behind for three to six months. This shows future lenders that you have struggled with repayments.
• Too many applications: Asking for credit too often, also known as a Hard Search, leaves a footprint on your file. This can quickly push your score down.
• Joint finances: Taking out a joint debt with your partner, such as a joint overdraft, means that their actions for those debts can impact your score.
• Debt solutions: Options like an IVA or bankruptcy will lower your score for at least five or six years. A Debt Management Plan will also show lenders you are paying less than you originally agreed.

How do I improve my credit score?

You can take positive, practical steps to improve your credit rating over time.

• Register to vote: Lenders use the electoral roll to check your permanent address.
• Use credit carefully: Having no borrowing history makes lenders unsure about you. You could use a small credit card for your weekly food shop and clear the balance every month to prove you can manage money well.
• Close unused accounts: Having lots of available credit you do not use can make lenders nervous. It is often better to cancel old accounts.
• Give it time: A long history of steady repayments proves you are reliable

Is having a low credit score a bad thing?

Having a low credit rating does not have to be a problem. It is fine if you can budget well and do not need to borrow new money. As part of our service to all PayPlan clients, we look closely at what you earn and spend. We can often find easy ways to help you save money.

Getting out of debt is always the main goal. It is much more important to use a debt solution that truly helps you out of a difficult spot. Your credit score is completely repairable. It will slowly improve as you keep your details correct, make regular payments and clear your debts.

If you’re worried about your credit score, we can help you.

If your credit score is causing you stress, please speak to our advisors today for a friendly chat. Get free, confidential advice online or call 0800 316 1833 to speak to one of our experts. 

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