Credit ratings and how Trust Deeds affect them
What are credit ratings?
If you have a burden of debt threatening to overwhelm you or sequestration looks likely, chances are you’ve already thought seriously about Trust Deeds and how they can help you. But you may have yet to decide to go ahead because of what you have heard about the effect that a Trust Deed can have on your credit rating. But do you know exactly how credit ratings work and why you are probably worrying unnecessarily about what a Trust Deed could do to yours?
What are credit ratings?
Our credit rating system is an amazing record. Every single credit transaction that occurs in the UK is assigned to an individual, and permanent detailed record kept of how each of us uses credit. Lenders use this to estimate the credit worthiness of each of us based on our lending history. For example, have we ever had a Trust Deed, been sequestered or defaulted on a payment? Are we carrying to much debt or have too much credit and shouldn’t have any more?
Every lender has a wish-list of what they consider a perfect creditor to be, with ‘points’ added or deducted for various factors such as:
- The amount of credit we have
- Our spending patterns
- Our current level of debt
- Any defaults we have made on credit payments
- The interest rates we are being charged
Our final score determines whether we will be given more credit based on whether we are over or under the lender’s threshold limit for a perfect customer.
How are credit ratings collected?
Credit reference agencies are responsible for collecting credit information and lenders will request it in the form of a credit check when we apply for credit. However, even if the information collected reflects the fact that we have a good credit history, it doesn’t mean we will be granted credit.
How do lenders use credit ratings?
Lenders don’t want us to borrow little and pay everything back in full – we wouldn’t be considered the ideal customer. Credit ratings are used to see if there is the potential to make money from us. For example, a lender’s ideal customer might be someone who carries a balance on credit cards from month to month and always pays on time. They generate profit for the lender in the form of interest payments and have a good record of paying promptly. But there could come a time when that borrower turns into a bad risk if they take on too much credit. A Trust Deed is a sign of one of those times.
What effect do Trust Deeds have on credit ratings?
Trust Deeds have a negative affect on credit ratings. It is a sign you have asked a professional to manage your creditors, and part of a Trust Deed agreement is that creditors must write off a significant part of your debt. Lenders will be too nervous to give your credit after a Trust Deed has finished because they have lost money.
However, this is no reason to dismiss Trust Deeds as a debt solution. It is important to consider just how your existing debt is affecting your credit rating in the first place. If you are having serious financial problems it will be apparent to a lender from your credit score. You may have defaulted on payments already, or it will be clear that your debt payments are very close to exceeding your income so it will only be a matter of time before you default. Or eventually you will run up against a wall where you have used up all of your available credit and lenders will refuse your applications. If you have been living on credit, this is a very scary position to be in and it is often the point when most people start to look at Trust Deeds or considering sequestration.
What happens to credit ratings after a Trust Deed is complete?
A Trust Deed stays on your credit record for lenders to see for many years afterwards and getting credit – certainly in the beginning of your debt-free life - will be very hard. This might not bother you if you have decided to stay as far away from credit as possible after your Trust Deed ends. However, if you need to obtain credit in the form of a mortgage for example, you will have to spend time rebuilding your credit record.
But the loss of a credit rating is a small thing when compared to the massive benefits of a Trust Deed. There’ll be no more creditors hassling you, no more scratching to find money for basic living expenses or feeling scared by what the morning post will bring. Finally, for the first time in years, you’ll feel optimistic and excited at the prospect of a happier debt-free future.
