No two months in a row can be the same financially. A big expenditure may crop up or you might be eased out of your job. Things are more difficult for those who are living paycheque to paycheque. Keeping up with payments is hard when you are cash-strapped. You can fall back on savings until you bounce back, but what if your savings are very little or have already drained?
Many of you believe that your credit report is subject to negative implications only when you miss a payment or make a default. “A number of other factors are taken into account to determine your credit points and one of them is your reliance on loans,” said Joe Smith, the financial advisor of FloraFinance.
“When cash is tight, it is natural to be tempted to rely on credit cards. The use of your credit card is OK as long as your credit utilisation ratio is not more than 25%,” he added. Your credit score will start declining once you rack up your credit card debt. You need to understand how your credit information is processed and how it affects your score.
Missed payments will have the worst impact on your credit file
Missed or late payments will stay on your credit report for two years, and defaults will stay for six years. Missed payments can lower your score by 80 points and default by 350 points. Lenders will stress your past payment records when deciding on approval and interest rates.
It can take a long time to heal your credit score. If you are past the due date for one reason or another, make sure you settle your dues within 30 days. Lenders wait until a month to inform credit reference agencies of your default. You can avoid having your credit rating dropped by making payments within 30 days from the due date. However, interest penalties and late payment fees will be added to your account.
Low credit scores can cost you thousands of pounds
A low credit rating will make it harder for you to borrow money at lower interest rates. Even if your income is good, you cannot offset the damaging effect of your poor credit history. Considering you as a default borrower, many lenders will restrict the lending term, too.
As a result, the size of your monthly payments will go up. It will make it harder for you to stick to payments when you are cash-strapped. Small loans, in particular, for which the repayment term does not exceed a month, are affected as they are paid off in full on the due date.
You may not realise it when you borrow a small sum of money because you simply focus on the interest amount you are to pay, which is calculated for a month. In reality, the total of the debt will be four times the original amount of the loan if you accrue interest for a full year. The APR of small loans can be up to 1500%. You should carefully weigh up the APR while taking out small loans, including loans on universal credit from a direct lender.
How can you protect your credit rating when cash is tight?
Here are some of the ways you should use to address your financial problems to prevent their impact on your credit file:
· Whittle down your monthly outgoings
First off, you should look at your budget to check how much money it allows you to spend. Based on previous months’ spending, you should create categories so you know which area ate into your money. Then, you can carefully examine where you can cut back on. For instance, you can use public transport rather than your private car to save money on fuel.
Another thing to focus on is your debt. You should know how to reduce your debt burden. Consolidation will help you when you have multiple debts. “It is advisable to consolidate your loans before you miss any payment as they are an option for good credit borrowers,” said Joe. “If you have racked up your credit card bills, you should use a balance transfer credit card. It will allow you to get an introductory period to settle your outstanding balance without incurring any interest.”
· Make it easier to pay on time
Debt payments must be your priority. As soon as you receive your pay, you should immediately stash away money to be used for debt instalments. Make sure you have a separate account in which you keep that money and set up an auto debit mode. A direct debit system will keep you free from remembering your due dates. The balance will automatically be deducted as and when a payment is due.
If you have come up with a financial emergency and you have insufficient balance, talk to your lender immediately. Inform them of your true financial condition, so they can defer a payment or put you on another repayment schedule. Having been notified beforehand, they will not report your missed payment to credit reference agencies. However, the interest will keep accruing unless the full settlement.
Use a budgeting app and link it to your pay account. It will help you see all your transactions in one place. You can easily track your outgoings. It will help you understand how much you will have left with after making debt payments. You should try to live off that portion of your money.
· Set up alerts
Due dates often slip through minds especially if you are juggling between multiple debts. Although direct debit is a way to ensure on-time payments, you are still supposed to make a proper account balance to avoid a penalty. Set up alerts and notifications can help you maintain your balance before the due date of every loan.
“Mark on your calendar the due dates of every loan, your phone bills and rent,” said Joe, “because it will help you maintain a sufficient balance in your account before your bills are due. Being on top of your bills is a great way to protect your credit score.”
In case of difficult times, you should talk to your lenders if they can help you by pausing payments or putting you on a different repayment plan. Keep making minimum payments if you can because otherwise accrued interest will increase your loan balance.
Talk to your financial advisor if you are unable to decide what you should do. They can help you choose the best solution tailored to your current financial situation.
The bottom line
It can be difficult to protect your credit score when money is tight, but it is not impossible. You should figure out your current budget and outgoings. Find out how you can cut back on your expenses and utilise that sum of money to repay your debt. Talk to your lender to see if they can help you revise payment plans if you are in a tight spot.
You should always ensure your credit report is healthy because it plays a crucial role in determining the interest rates your lender will charge. The impact of missed payments and defaults stays for a long time, so you should avoid them. Pay your rent and other bills on time as well.