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by John Dickinson
I have always believed that prevention is better than the cure and this is certainly the case with credit reporting.
While many people know they have a credit file and a potential lender will assess this before approving a loan, few understand much more. It’s often not until people apply for finance that they find out they have a problem with their credit file, a problem that can potentially stop them obtaining credit for years. Sadly, many of these credit problems could have been avoided.
Even the most diligent person can easily run into trouble when it comes to their credit file. It could be as simple as a dispute with a bill or changing address and forgetting to update the service provider. The reality is that almost all larger companies have a process driven billing and debt recovery system, and this can often lead to damaging people’s credit file. Once the damage is done it can be difficult to reverse.
We are often asked how is it that a small blemish, such as a paid default to say a phone carrier, can have the same potential penalty as a serious default to a major bank? The answer is in the way most credit providers assess risk. The days of a person reviewing an application and reaching an informed and logical decision are long gone. Most of this process is now fully automated and some would say the logic has been removed from the process. In a world where we have become completely reliant on technology, for the most part it is now a computer that decides to approve or decline an application, and one of the first places the computer will look is the applicant’s credit file. Given a computer does not have the ability to separate good from bad, serious or minor, right from wrong, the outcome is often a system decline regardless of the nature of the negative credit listing.
I’m afraid the news only gets worse… even multiple enquiries on a credit file can be enough to lower a credit score and trigger a decline to an application.
Let’s say someone is looking for a home loan and they use the services of a mortgage broker and that broker makes a number of applications to lenders, the fact is that every application will be recorded on the person’s credit file. If there are a number of these over a short period of time, they can end up with an impaired credit score. Ironically, it can be looking around for the best loan that actually stops someone getting one.
I’m not criticising the services of mortgage brokers, far from it, as most are very professional and provide a valuable service, I’m simply pointing out how easily this can happen to someone with an otherwise good credit history.
That’s enough bad news! Let’s look at some ways people can prevent damage to their credit file in the first place. Here are my top six tips for avoiding trouble…
Keep creditors updated
While it’s common for people to move address or change contact details, not keeping creditors updated can lead to credit file problems, as if there is an issue with an account, the creditor may be unable to reach the client. This is quite common with renters as they tend to move more frequently and forget they have accounts in their name, or thought they had paid the final bill when in fact an account is outstanding.
Keep an eye on direct debits
It’s easy to miss that a direct debit hasn’t been processed. You would expect the creditor would call straight away if they hadn’t been paid, however this is not always the case. We have seen defaults listed due to back end payment system errors with creditors and if the account holder had contacted the creditor when a payment didn’t go through, the damage to their credit file could have been avoided.
If a dispute is raised with a creditor don’t assume their lack of contact means the matter is resolved
While you would think that a creditor would be proactive after a dispute is raised, unfortunately some disputes fall into the ‘too hard’ basket or get lost between departments. Many people take the creditor’s silence as resolution, but this isn’t always the case and damage to a credit file can follow.
Maintain a regular payment pattern
With payment history now being recorded on a credit file it is more important than ever to maintain a regular payment pattern. While making a payment a little late may not seem like a big deal, the fact is a late or missed payment on an account, even if it is made up later, can be enough to lower a credit score and cause issues when trying to secure credit.
Call your creditors when things get tough
If a borrower falls on difficult financial times, it is very important to make contact with the creditor straight away. In most cases the lender will be helpful and most importantly, once a lender has acknowledged their client is experiencing financial hardship they should not start or continue any recovery action, this can help keep damage to the person’s credit file to an absolute minimum.
Get it in writing
Make sure any arrangements that are made with a creditor is in writing. I have seen too many examples of people thinking that everything is fine, but the creditor has a different interpretation of what was agreed. I’ve even witnessed cases where a creditor has denied any such agreement was in place and without that all-important evidence in writing, damage to the borrower’s credit file can easily occur.
Well, there it is, simple really. However, it is an unfortunate truth that many good people run into what was often an avoidable problem with their credit file.
While in some cases defaults can be removed, this can be a costly and time-consuming process and not having a default listed in the first place is always the preferable option.
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