These are the most common forms of bad credit. When you don’t pay a bill, or credit repayment, after the credit provider has attempted to recover the debt unsuccessfully, a default will usually be listed on your credit file and remain there for up to 5 years from being listed. The most common forms of defaults are phone bills, or utility accounts, but also loan and credit card repayments will also appear as defaults on your credit file if unpaid.
How a default is viewed by the lender varies upon many factors: How long ago was the default listed? Is the default paid or unpaid? How long from when it was listed was it paid? Is the default a utility or financial default? Is the default a once off or is it part of a collection of defaults? What circumstances lead to the default and how have circumstances improved?
By understanding the answers to all the above questions, a broker is able to workshop, and have the knowledge to present the deal in the right way to the right lender, to get the best result each time for their customers.
Similar to a default, a court judgement is listed on your credit file if a court ruling determines you to be liable to pay a particular debt. The most common court judgments seen are for un-paid council rates, however other things such as debts to suppliers for self employed applicants are also common.
The way a lender assesses a court judgement is a similar process to how it assesses a default. Lenders asses factors such as: How long ago was it listed? Is it paid or unpaid? How long from when it was listed was it paid? Is the judgement a once off or is the applicant a habitual offender? What circumstances lead to the judgement and how have circumstances improved now?
By understanding the answers to the above questions, a broker builds a profile so they can present the application to a lender that will look past only what is listed on your credit file so that you can get the approval you deserve.
Bankruptcies (Part IX, Part X)
Bankruptcy is a legal process where you’re declared unable to pay your debts. This can either be done voluntarily (debtor’s petition) or someone you owe money to can bankrupt you through a court process (creditor’s petition). When you are bankrupt, a trustee is appointed to manage your bankruptcy. The trustee must be aware of all your income, assets, and liabilities, and may sell some of your assets to help pay the debts.
There are 2 forms bankruptcy:
Part IX – This is considered a less serious form of bankruptcy. A part 9 debt agreement will be entered into when although the debts may be out of hand, might not be completely uncontrollable. The trustee will take control of your debts and and take over all communication with your creditors. You will enter a payment plan with your trustee to repay the debts.
A Part IX debt agreement will usually last 4 years, but can be paid off early. Once paid off, your credit file will be updated to reflect being discharged from the agreement, however this will remain on your credit file for up to an additional 3 years still placing you in a high risk category.
Part X – This is considered full bankruptcy, where your debts have exceeded a point where it is realistic that they could ever be repaid. Repayments may still be required however if your income exceeds a certain level. Once you have entered full bankruptcy, you will be unable to attain credit for a minimum of 3 years until discharged. When discharged, your credit file will reflect you being discharged from bankruptcy for up to an additional 4 years.
Being a discharged bankrupt, you are still in a high risk category, however there are options for finance. Similar to other Bad Credit loans, it comes down to understanding the whole profile. People do fall into circumstances that can occasionally be outside of their control, so it all comes down to being able to demonstrate to the lender that current circumstances have significantly improved over the circumstances the lead to the credit issues.
Active Credit File / Low Credit Score
This is a credit issue we are seeing more often. You may have never received any defaults, court judgements, or bankruptcies in the past, however you keep getting declined and people keep telling you it’s because you have a low credit score or an “active credit file.” Your credit file holds a large amount of information about your credit activity, and is scored based on the information. Beside your credit score is the statistical likelihood of you having adverse credit within the next 12 months reflected as a percentage. More and more lenders these days are putting a stronger focus on your credit score meaning your application could be declined as a result of a low score even if you’ve always paid everything on time.