If you have too much debt, you may not want to do anything that will harm your credit score.
But do you have any better alternatives? That depends on three factors:
- what is your credit record like at the moment? If it isn’t good, then it isn’t worth trying to protect! Check your credit score now, so you have accurate information.
- can you make the monthly payments to your debts? The answer completely changes the options you have for getting your debts down.
- is it really likely your situation is going to improve in the next few months? Hoping for a lottery win doesn’t count!
Let’s look at some typical situations to see how the different answers to these questions affect what your good choices might be.
Mr A – very good credit rating, can just afford the monthly payments
His very good credit rating can be a very useful tool in helping with Mr A’s debts because it may allow him to refinance some debt to reduce the interest he pays.
He could look for a 0% balance transfer. Or consider a cheap consolidation loan. Both of those options need a pretty good credit score so protecting it is important for him. He may find this slow going at the start, but as he pays off some debt, he pays less interest and the balances start to drop faster. This is often called snowballing.
Mr A may wonder if a payment arrangement on any of his debts would help speed this up. His creditors probably wouldn’t offer one as he can afford the minimums, and if they did, the arrangement would harm his credit score, making it harder to deal with his other debts.
Ms B – good credit rating, card balances going up each month
Ms B hasn’t missed any payments but is worried that her debts keep going up. She often has to pay for some of her regular bills and groceries with her credit cards and is in her overdraft for most of the month.
A debt adviser will point out that she actually can’t afford her monthly debt repayments – she is only staying afloat by borrowing. This gets her through this month but it increases her minimum payments the next month, so she has to borrow more.
The increasing balances on her credit cards will start to affect her credit score. And, as her debt increases, any new credit she gets will tend to be more expensive.
If she looks at payment arrangements or a debt management plan, this will affect her credit record. There is no “magic option” that will let her pay less than the regular monthly payments and not harm her credit score. But realistically her only choice is to do this now, or struggle on for months or years then do it with much more debt, which will take much longer to pay off.
Mr & Mrs C – can’t get a consolidation loan
Mr C was hoping to get a large consolidation loan to repay a lot of other debts. He did this a couple of years ago, but their credit card balances have grown again and they are now having difficulty managing the card repayments as they are still repaying the previous consolidation loan. They have applied for a new large consolidation loan but been rejected.
This can feel frustrating because they know the repayments on a consolidation loan would be more affordable. But to a lender, giving them a big loan looks too risky, even though they both have OK credit ratings.
They are worried about any debt solutions as they see a consolidation loan in the future as their best option. But Mr and Mrs C need to look at debt options such as a debt management plan.
A debt adviser can help them explore if they have any better alternatives, but unless they can significantly reduce other expenses they need some form of debt solution. Their credit record isn’t really relevant here because there are no options that let them protect their credit record and get the lower payments they need.
Mrs D – wants to avoid defaults
Mrs D has payment arrangements with her credit card and a couple of catalogues. They have said they won’t add defaults, which she is happy about.
These arrangements were made two years ago when she was on maternity leave. She had hoped to go back to normal payments when she was back at work, but childcare costs meant this wasn’t possible. She has had to borrow some more money recently at a high rate of interest to pay some bills.
Mrs D’s problems are getting worse. She may want to carry on with her current payment arrangements, but they are too high for her to manage. She is probably going to struggle repaying the new credit in a few months. She needs to take some debt advice about her options, even though they may involve defaults.
Also these payment arrangements will be damaging her credit score for many years. A default would drop off after six years, but payment arrangements will stay for six years after the balance is settled.
Mr E – in a DMP but advised to go bankrupt
Mr E is in his mid 30s and has been in a DMP for a year after having job and health problems in his 20s. He is paying more than £150 a month, but it will take more than ten years to repay all his debts. His DMP firm originally said he should go bankrupt, but Mr E was hoping to avoid that. At his first DMP annual review, his situation hasn’t changed much and bankruptcy has again been suggested.
Mr E’s main concern is that he wants to be able to get a mortgage in future.
But Mr E has little chance of ever getting a mortgage on the course he is currently on. It’s going to take too long to repay his debts, then he would need to save a deposit. He shouldn’t let what is little more than a fantasy about buying a house in future stop him from taking the right decision about his debts now.
There is no simple answer to how to solve a big debt problem and put yourself in the best position to get a mortgage afterwards. But if you don’t solve the debt problem you have no chance!
Bankruptcy will be on your credit record for six years. During that time you won’t be able to get a mortgage. This also applies to an IVA or a DRO – all types of insolvency have the same effect on your credit record and chances of a mortgage afterwards.
After the six years, mortgage lenders often ask whether you have been bankrupt or had an IVA. But if you have a good deposit, then there are high street lenders that will give you a mortgage after the six years has finished.
Miss F – getting letters about persistent credit card debt but can’t pay any more & worried about future mortgage
Miss F has several credit cards and the balances have been going up. Unlike Mrs D, her credit record isn’t good as she is using a lot of her credit limit and has been late paying a couple of times.
Some of the cards are writing to her about persistent credit card debt suggesting she has to pay more or they will suspend her account.
She thinks she can make the minimum payments but it’s a struggle and she knows she can’t pay more, but she is worried that asking for a payment arrangement will harm her credit score and she wants to buy a house in few years.
Miss F needs to be realistic. With her increasing debts she has no chance of saving a deposit for a mortgage. She needs help to get her debts under control so they are dropping every month. She should talk to the credit cards about whether they can help her by freezing interest on her debts and if they say No, she should talk to a debt adviser about a DMP.
Mr G – temporary drop in income (eg Coronavirus)
Mr G is a cab driver who has broken his wrist and won’t be able to work for 2-3 months. Before he was managing the repayments on his credit cards without a problem. He has a card with a low balance and he is thinking of using that to make the repayments to his other cards as well as for daily living expenses until he is back to work.
Many people will be in this situation in 2020 because of Coronavirus.
This can be a difficult decision. If it was definitely only for 1 or 2 months, and Mr G is sure that he will be able to make the repayments when he is back at work, then perhaps. But it’s very easy for your debts to spiral out of control when you do this. And his return to work may take longer than he hopes.
With a temporary problem, often the best thing is to ask your creditors for a payment break. Explain your situation – send a hospital letter about your broken wrist or an email saying your child’s school is closed because of Coronavirus.
Don’t let credit score fears stop you from sorting out your debts
Fears about credit ratings can be a big blocker to making progress with your debts.
If you can’t afford the monthly payments, your credit rating is going to suffer. Payment arrangements, DMPs, DROs, IVAs, bankruptcy etc all leave marks on your credit file.
StepChange has surveyed people who had not made any progress three months after getting advice about their debt options. 15% of them said that concerns about their credit records had stopped them taking action.
Time heals credit records – most problems disappear after six years. But time on its own doesn’t solve debt difficulties unless you take action. Borrowing more to protect your credit score just makes your problem larger and harder to sort out.