I think it's safe to say that most people have heard of payday loans, what with the countless adverts for them on TV these days. A lot of people have heard of them, a lot of people use them, but how many people actually know about their effects on credit ratings?
We get lots of questions from customers about whether using payday loans will negatively impact their future credit rating. Anecdotal evidence from the lenders we work with suggests that taking out a payday loan and paying it back on time won't necessarily bar you from getting credit from banks and other lenders - but this will always depend on the policies of the particular lender making the assessment.
However, home buyers do need to be very mindful of the much tougher affordability checks that mortgage lenders are being required to carry out and how a very recent payday loan, however managed, might be viewed in this respect. If the payday loan is symptomatic of underlying money-management issues then this is likely to cause a mortgage lender some concern.
The Competition Commission recently announced that half of all payday loan customers either take on further borrowing or roll over their debt within 30 days, with over a third paying their debt late.
Another issue highlighted by the Competition Commission is missed payments, which are certainly bad news for credit ratings whether on payday loans or any other credit agreement. Payday loan customers need to be sure they can meet their agreed repayments if they are to avoid falling foul of fees, further interest, and the likelihood of a tarnished credit record and the impact that can have.
I've pulled together some simple tips from Experian CreditExpert to help you prepare for a mortgage application in 2014:
1. Understand what is on your credit report before you meet any lenders. Is everything accurate and up-to-date? Pay attention to addresses, whether you're listed as being on the Electoral Roll at your current address, financial associations which are no longer relevant and or outstanding accounts that should be marked as settled.
2. Does your Experian Credit Score need work? The Experian Credit Score is a guide, to help you understand your credit report, how past credit management can impact on future credit applications and for you to monitor your progress as you get your finances in order before you apply.
3. Shopping around? Decide what kind of mortgage you want, how much you can afford and compare products you are likely to qualify for. Experian CreditExpert matches your credit profile to the best deals you are most likely to be accepted for. Only when you've found the best deal should you ask for an agreement in principle.
4. Do you want a quote or an agreement in principle? A quote will tell you what mortgage rate you're likely to get and what your repayments would be but do not require a full credit check. An agreement in principal will tell you if a lender will offer you a certain size of mortgage and is treated as an application and will leave a footprint on your credit report. Too many footprints could cause future lenders to be concerned you have been turned down for previous applications
5. Remember your credit report is only one part of your application. Lenders also use the information provided on your application form and that they already hold on you (if you're applying through your bank, for example).