BUY now, pay later has become an essential way of life for most of us.
We’re a consumer credit society where expensive purchases – Christmas presents, holidays, cars, washing machines, fridges, computers and smart phones – only become affordable because of personal credit.
More of us are now using deferred payments like PayPal or Klarna where you buy goods and split the payment over three months. In the first six months of this year, £5.6bn of consumer goods had been purchased this way in the UK.
Borrowing can be a liberating thing if it is fair, reasonable and affordable. Sadly, it isn’t for many people. In order to access credit at low interest rates you need a decent credit rating.
There are three companies who manage credit reference data in the UK for lenders: Equifax, Experian, and TransUnion.
These companies look at how long you have been on the electoral register for where you live and what credit agreements you have and whether you’re in arrears or have “defaulted” – missed payments for three to six months.
They record whether you’ve become bankrupt or entered into a debt solution such as a trust deed or debt arrangement scheme.
All of this information enables the credit reference agency to calculate a “score” (a figure out of 710 or 1,000). The score is a measure of the risk or likelihood of you being able to repay monies.
The lower the risk the higher the score and the more likely you will access a wider range of financial products at the lowest rates of interest. Whenever you apply for credit (even if it’s refused) this will leave a “footprint” on your credit reference file which is generally recorded for one or two years.
Applying for credit cards or loans too many times in a short period can lower your credit score, so it’s always better to search for possible products where lenders offer a “soft search” that leaves no footprint and lets you know if you might be eligible.
Never pay to check your credit score online as there are various ways to do this for free. If you do online banking you should be able to check your score through your banking app. Credit reference agencies will provide you with your score for free or use an app such as Credit Karma or Totally Money.
You can get free and impartial information on how to improve or build your credit score from Money Helper - Credit Score. It will usually take a few months to make a positive difference to your credit score.
The Information Commissioner’s Office (ICO) has produced guidance on the way credit reference data should be stored. Generally, it will take six years from the date of a default or bankruptcy for that fact to disappear from your credit reference record. This guidance can be found here: ICO - Credit - Your data matters
Contrast this with someone who’s repaying their debts via a debt arrangement scheme (DAS) in Scotland.
I spoke with someone who entered into a DAS in 2010 and cleared their debts in 2015. The six years only began to run from the end of the DAS, so it wasn’t until 2021 this came off the credit reference file – some 11 years later.
If that person hadn’t tried to repay their debts and became bankrupt this fact would have vanished from their credit rating in 2016.
Money advice colleagues in Scotland have brought to my attention a provisional decision of the Financial Ombudsman Service (FOS) in relation to credit reference reporting. A customer of a Scottish high street bank entered into a DAS debt payment plan over 10 years, and cleared debts this year.
The bank then reported this to credit reference agencies which means the DAS stays on the customer’s file until 2028 – a full 16 years! This seems irrational to me. You repay your debts and have to live with the negative credit score implications for a full decade longer than if you hadn’t paid them and became bankrupt.