How Bankruptcy Affects Your Credit Rating

Being in debt can be an incredibly scary prospect and one that all too many people are becoming used to these days. Debt in the UK is higher than it has ever been before and the effects are being exacerbated by the fact that lenders are increasing their interest rates, unemployment rates are rising and many people in debt are failing to get their debts sorted out before they get out of control. However, if you consider how debt and bankruptcy affects your credit rating, you will soon see that it can be much better for your long term financial health to bring it under control right from the start.

Your credit rating
is essentially a comprehensive financial history that includes information about your credit, your payments, your financial links to other people and the applications for credit that you have made. Credit reference agencies compile the information so that it effectively gives a snapshot of your finances so that lenders and other such financial institutions can make an informed decision as to whether to lend to you or not. As such, your credit rating is a very important piece of your life. If you neglect it or damage it in any way then you could find it difficult to get credit in the future. This is why it is important to find out how debt affects your credit rating and avoid the negative impact it may bring.

You may have heard that debt is good for your credit rating and in a way it is. Having a credit card and buying something on it will help you to build your credit profile in the first place. After all, without credit you cannot have a credit rating. Similarly, having a mobile phone and other such credit agreements in place will help to enhance your credit rating because it will ensure that you appear to be financially responsible to lenders. The problem comes when you build up excessive debt, miss payments or have significant debt management, such as an IVA or bankruptcy, in place.
In truth, to lenders it is all about the risk. Will they get their money back if they lend to you? Will you default on payments? These considerations are important and help to explain how debt affects your credit rating. First of all, lender will look at the level of debt that you have and, if it is at a manageable level, they will probably decide to lend to you, assuming that you are maintaining payments. However, if you have an excessive level of debt then they are more likely to turn you down. The level of debt will also elevate or lower your credit rating without any searches being performed.

The second point relates to missed payments and any difficulties you may get into when in debt. If you begin to miss payments then you do not project the image of a responsible borrower and so your rating will drop as a result. The more payments you miss, the more hits your credit rating will take as a result. In addition, having multiple lines of credit can have a negative impact on your credit rating because it also elevates that risk factor.
As you can see, debt can affect your credit rating in a positive way as long as you keep it to a minimum and under complete control. However, as soon as you lose that control or build up debts that can be considered approaching the limit of your means then you can expect the negative impact to hit. As such, it pays to be conscious about the level of debt that you have as well as how well you are managing it. Keeping it under control is imperative because you never know when you may need your credit rating to be in the best of health.

Andy Gorton is the author and editor of the Bankruptcy Clinic

Andy Gorton – who has written posts on Bankruptcy Clinic Blog.


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