What effect when defaults drop off?

Milzee87

Hi all...first post and hoping for some clarification...

• I had various defaults which have now dropped off of my credit report.
• My last default will come off on 31/10/14.
• I am on electoral role and have various other lines of credit (all up to date, no adverse stuff with them, and naturally because of the defaults am paying huge interest on them).
• My current credit score is 522 which I know is somewhere between poor and very poor.

Does anyone know what effect the final default dropping off will have? I.e. will I be able to get credit with a fairer interest rate in order to consolidate these high interest accounts? and if so after how long? November? 6 months? Bearing in mind I have credit at the minute that is kept in good order.


Apologies if this has been asked before, I have searched and can't seem to find a comprehensive clarification to this particular situation.

Tixy

Hi, welcome to the forum.

Once the defaults drop off your credit file - then straight after that any credit application search will not see those defaults or the accounts associated with them.

Any lending decision will be based on your credit file at the time you apply, and on your financial situation at the time you apply.

So impossible to say whether you will find it possible to get further credit at that point, as it not only depends on your credit file but also on how much you currently owe and are repaying on your debts compared to your income etc. A potential lender never sees the score that the credit reference agencies will sell to you.

One thing worth mentioning in relation to obtaining credit for consolidation existing debts - people often have issues with this due based on the lenders affordability calculations (lenders assume you will be borrowing additional money and will look to see if you can afford repayments on both your existing debt and the new credit you are applying for).

Milzee87

Hi Tixy


Many thanks for your reply, that certainly provides some clarification.


Yes that does sound like an issue, you would of thought that if the new line of credit was for consolidation of existing ones that they would take that in to account! I suppose they must have their reasons.


Is there some kind of ratio used to work out how much someone can borrow in relation to their income and what they already owe that I could use to do some calculations?

Tixy

Lenders are risk averse, so as they cannot force you to spend the new money repaying old debt they also consider the worse case scenario that you spend it on something else, or do pay off the debts and then run them up again.

Each individual lender is only interested in the risk of you not repaying them, not that it may be cheaper overall for the customer.

As a rough guide it generally gets harder to borrow money that will take your overall borrowings above 50% of your annual income.
E.g. debts of say £12k and wanting a £12k consolidation loan with income of £30k. Lenders would consider if you could afford repayments on £24k of debt and take that risk factor in to account when deciding to lend and what rate to offer.

Milzee87

Okay I see. Thanks for your help Tixy.


So basically someone on approx. £35k pa would not necessarily struggle on getting a loan of say £10k with £7k existing debts (whether or not they will be paid off with the loan)

Tixy

The 50% idea is only a general guide, there are certainly people who have managed to recently borrow more than that.

And of course people who are unable to borrow as much as that.

So in your example then I'd agree someone would 'not necessarily' struggle, but lenders will also look at other affordability indicators (such as how much they are paying off their debt currently each month, are they only making minimum payments, are they constantly in an ovedraft etc) when making a decision.