Credit ratings and the impact of short term loans
As individuals we all have what is known as a credit rating or credit score. The way in which this is determined is fundamentally dependant on how we behave concerning our past and present credit based agreements. A credit agreement could mean anything from a mortgage right through to a mobile phone contract and anything in-between. Over the years the Credit Reference Agencies have only ever become more detailed in their approach to recording our behaviour for our credit agreements and as such monitoring and understanding our ‘score’ or ‘rating’ is more important than ever. How we are scored is then used by potential future credit providers as part of their assessment in granting, or declining, a new request for a credit facility.
In our modern day economy credit seems to not only exist everywhere but also is being used everywhere by consumers for a whole host of different reasons. For many the ability to obtain credit allows the ability to access the goods and services we desire. I think it would be fair to say that in decades gone by that credit was still a strong presence but perhaps was reserved for more major purchases where readily available sums of such money simply was not possible. This meant that consumers would use credit to enable the purchasing of a house or even a car but smaller scale borrowing was much rarer. As the years have continued to pass and credit has increasingly become more and more available, the overall attitude we have towards credit has alternated also. Nowadays it would not be uncommon for a consumer to use a small loan, such as the resources offered by short term loans, to fund the purchase of a new piece of furniture for example. Equally consumers are used to using credit offered directly by suppliers at the point of making a purchase; whether this be a clothing purchase or a holiday purchase for example. Many companies offer credit agreements to their customers as standard practice and therefore consumers have the ability to make agreed repayments towards seemingly small purchases if they so wish to do so.
Our continued use of a whole host of different credit based agreements means that effectively managing these agreements is more crucial than ever before and this is because of our credit files. A credit reference agency will enter any and every short term loans resource, Hire Purchase or home lending commitment we have on a monthly basis. This means there is for each of us a constantly updated record of exactly how we are preforming for these sources. Where repayments are maintained as is set out in loan agreements for the likes of short term loans, the credit reference agency will denote the file as such. Obviously in instances where credit is successfully repaid and subsequently settled, this will likely build up a ‘positive’ credit reference file. In instances where repayments are instead missed or later defaulted, this will have an overall ‘negative’ effect on the individual’s credit score or credit rating.
The score or rating you have will not only be directly affected by the entries within your credit reference file but also the credit reference agency in question. Where one may use a number based system for reflecting your credit history, such as a score out of 5, another may use a percentage or larger scale number, say for example a 750 score being a perfect credit file. Given that each credit agreement is always listed in the file as an individual concern then a combination of these entries formulate the overall score, every entry therefore has a direct effect. Take for example short term loans or mobile phone contracts. When a credit reference agency lists that a contractual repayment has been either missed or furthermore is severely overdue, the next potential lender to review this file may make a decision to reject your request for credit based on this. As mentioned given the fact that credit reference agencies also produce a score or rating, this single value alone may result in an immediate decline for further credit. With this in mind it is worth considering the fact that missing a repayment for a short term loans commitment for example, or reaching the point of defaulting such an agreement may halt your ability to obtain future credit. This is why it is fundamentally more important than ever before to borrow sensibly and within realistic means to avoid repayment commitments being missed.
Representative Example: Representative 1286.98% APR on a loan of £300.00 with 5 monthly repayments of £101.03 Total amount repayable £505.13 Annual interest rate (fixed) 290%
Warning: Late repayment can cause you serious money problems – For help, go to moneyadviceservice.org.uk
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Author: Internal Marketing Department