Debt Management and Your Credit Score

Unaffordable Lending: What This Means for Your Credit Score?

Discover how unaffordable lending can affect your credit score

Image of Coins falling out of a glass jar, with blue border and black text box with white bold font. Unaffordable lending concept

Getting into financial difficulty can often lead to several bad decisions – like using unaffordable lending streams in order to access more cash or make a purchase. Not only can this lead to spiralling debt, but it can also negatively impact your credit score, which in turn can exclude you from credit products in the future.

Often people can take on extra debt to deal with existing debt, or to tide them over until payday, the difficulty lies when it comes to making the repayments because anything that you can’t afford to pay back or, could never really afford to pay back in the first place, can easily lead to financial difficulties. The worrying part is that people are often only one missed payment away from spiralling debt.

Lenders have been caught out and fined in the past by not checking that borrowers would be able to repay any credit in a sustainable way. Here are some examples of unaffordable lending and what they might mean for your credit score if you couldn’t afford the repayments.

Payday Loans

Payday loans are designed for extremely short-term borrowing. The theory is that people borrow a small amount, usually between £100 and £1,000 and pay it back in a couple of weeks – or when their payday arrives.

However, problems can arise if the loan is not paid back in full before the agreed date. Most payday loans have huge interest rates, with some well over 1000%. This can trap the borrower in a spiral of debt, with most of their repayments simply paying off the interest.

Taking out a payday loan should not affect your credit rating as long as you pay it back in full on time. However, some providers and other institutions may have a negative view of payday loans. They may feel that seeing more than one on your credit history points to a habit of irresponsible borrowing.

Buy Now, Pay Later (BNPL) Schemes

BNPL schemes have been introduced by retailers and third parties, such as Klana and Clearpay, to allow customers to spread the cost of purchases usually over three to six months. 

One of the main problems with BNPL schemes that have been flagged by consumer groups recently are that people are being seduced by the ability to buy something they wouldn’t ordinarily buy because they couldn’t afford it. A survey by Which?, revealed that shoppers ended up spending more than that they had initially planned to when offered a BNPL.

Even though the costs are being spread over several months, many customers still find it hard to pay off the amount they owe on various items. According to 10% of customers who have availed of BNPL schemes in arrears, they are struggling to keep up with their repayments. Missed payments on your credit history can bring your credit score down. 

Overdrafts

An overdraft is a facility that your bank or building society offers you to effectively spend more money than you have in your account at that time. Your account provider will likely offer you an overdraft limit. For example, if your overdraft limit is £500, that means you can spend £500 more than you have in your account, or effectively borrow £500. 

This is known as an arranged overdraft. Using an arranged overdraft will not significantly affect your credit score, provided you manage it well and ensure you don’t spend more than your overdraft allowance. If you do go over your overdraft limit, this is known as an unauthorised overdraft, which can have a majorly negative impact on your credit score and you may also endure higher charges and fees from your bank. 

Not only will you be subjected to charges from your bank, but you may also miss a payment to a creditor. A missed payment will go on your credit report and will impact your credit score. Usually, a missed payment will remain on your report for up to seven years – which is something to be mindful of if you’re thinking about taking out a large loan or mortgage in the near future.

However, sensible use of an arranged overdraft can work in your favour. If a lender sees that you can borrow and repay a debt, they will look favourably on you when it comes to offering you credit in the future.

👉 Check out our informative blog post if you’d like to learn more about the hidden costs of having an overdraft facility

Alternative Banking with Suits Me

If you’re tempted month after month to just dip into your overdraft to pay for something and have found that you’re now stuck in the cycle of debt, you may want to look for an alternative way of managing your money – a way that doesn’t tempt you with an overdraft or loan. This is where Suits Me can help, with a prepaid debit card

A prepaid card works in a similar way to a debit card, except there is no overdraft or lending facility attached – removing the option to slip into debt and needing to pay fees and charges for borrowing the money.

Here at Suits Me, we offer much more than just a basic prepaid debit card. Our accounts are personal e-money current accounts that work similarly to a traditional bank account. You’ll gain access to online banking and our mobile banking app, where you’ll be able to manage your money on the go, 24/7.

We offer a whole variety of banking features including:

Opening a Suits Me account takes 10 minutes and you’ll gain access to your online banking immediately so you can start managing your money. We don’t ask for proof of address or run a credit check. We accept 99.8% of all applicants – so if you’re looking for a suitable alternative banking solution apply today!

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