It only takes a small mistake to cause big problems for your credit history – and your chances of borrowing in the future.
And it doesn’t matter whether you’ve missed a payment for £3 or £3,000, it has the same effect on your credit history. That’s because what counts is that you missed the payment.
We take a look at how a simple error could be catastrophic for your future finances.
Let’s say you have a mobile phone contract. These contracts can be the only way many of us can afford the latest mobile handset, which can cost hundreds of pounds to buy let alone use.
A mobile contract allows you to walk away with a new phone that day - perhaps in exchange for a deposit, depending on your deal. You then make a monthly payment, which covers some of the cost of the phone along with your service package (including your call time, text and data allowance).
If you decide to get a new phone on a new contract and close your old one while there’s still money outstanding on it, this can be bad news for your credit history. Even if you only had £3 left to pay, you will still be in violation of the agreement you made with your original phone provider.
The thing is, a mobile phone contract is a credit agreement. You agree to pay a certain amount a month and at the end you own your phone. You can then either upgrade to a new handset and new contract, or keep the phone you have and just pay for your service plan.
But if you close your account before you’ve finished making your payments, you haven’t kept to the terms of your agreement. This will show up on your credit history.
Similarly, if you miss a payment or stop paying your phone bill altogether, this will also show up on your credit history. And even if it’s only a small bill you miss, it could equal a big problem in the future.
Okay, so you had a phone contract and stopped paying your bill while there were still a few pounds outstanding. It’s now five years later, you’ve forgotten all about the phone and you’re preparing to buy your first home.
You find a mortgage you can afford and apply to the lender, but they turn you down. Now, your lender doesn’t have to tell you why they’ve turned you down, but if you check your credit history, you may find that the reason for your predicament is that old mobile phone contract.
Things like missed and late payments stay visible on your credit history for six years. So, when you apply for credit at any point during this time, the lender will be able to see that you’ve missed a phone bill or not finished paying off a previous contract.
This can make you appear like an irresponsible borrower to them. If you’ve not paid back a lender in the past, what proof do they have that you’ll keep up your repayments to them?
How to fix it
Unfortunately, if you have a poor credit history, there’s no quick way to fix it. But that’s not to say you can’t improve it.
You need to show that you can be trusted to borrow responsibly, which means keeping on top of your payments. If you have an old phone contract, make sure that there’s no money outstanding on it and if there is, get in touch with your provider.
Over time, you’ll be able to create a record of responsible borrowing. And after six years, those blips should drop off your credit history altogether.
Just don’t make the mistake of thinking that missing a few pounds today won’t matter – it could cost you a lot in the future.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.