PERSONAL FINANCE:DOES ONE MISSED mortgage payment doom you to a life denied access to credit? Or if you messed around with a credit card when you were younger will this make it hard to get a mortgage now that you want to settle down? Given the difficulties faced by many people at present when it comes to settling their bills, understanding your credit rating – and looking at ways of improving it – has never been more important.
When you borrow money from a financial institution, you automatically give your lender permission to send information about your repayments to the Irish Credit Bureau (ICB). So, any late or incomplete payments could condemn you to a life without the ability to borrow, as potential lenders may run a check on your credit history before lending you any money. Without a good credit rating, you may find access to credit very difficult, or where it is available, it may be more expensive, as is the case with sub-prime mortgages.
“It’s the key to getting finance in the credit society we now live in,” says Frank Conway, a director with the Irish Mortgage Corporation. “You’ll find it near impossible to do so if you have negative comments on your credit report.”
John Lowe, financial adviser with The Money Doctor agrees. “It can be impossible to get a loan – not only do you have to prove that you have an income, but you need to have a squeaky clean record, and banks still have a reluctance to lend.”
For Bank of Ireland, a person’s credit rating is an important factor taken into account in the lending decision, “as it demonstrates the customer’s payment history on previous/current borrowings with Bank of Ireland and other financial institutions”.
At AIB, “the financial track record of our customers is important in assessing applications”, but the bank also adds that it is “chiefly concerned with a borrower’s sustainable capacity to repay any sums advanced”.
Given how easy it is to get a copy of your credit rating, if you have any concerns over your credit history you should apply for your report. While all information recorded should be correct, mistakes do happen so keeping an eye on what information is being kept in your name is a prudent move.
Lenders send information about borrowers who have mortgages, car loans, personal loans, leasing/hire-purchase agreements and credit cards and your report includes information such as the names of lenders and account numbers of loans you currently hold, or that were active within the last five years; repayments made or missed on these loans; and any legal action taken against you. To get a copy of your report, you can apply online, at icb.ie, and for a fee of €6 you will get a copy of your credit report within three to four working days.
The ICB collates all the information it receives on you from the various lenders from whom you have borrowed money, and from this produces a Credit Bureau Score (CBS), which indicates your future ability to repay a loan. The factors which go into determining this figure include values such as the number of previous late payments, number of accounts, and number of previous applications for credit in the preceding 12 months.
The ICB stores information about borrowers and their loans for five years after the loan is closed, or in the case of a judgment against you, it is stored for life.
Before you start panicking that you’re going to have all your lines of credit cut off because you recently switched from Halifax or PostBank to another bank and your direct debits were late in being set up, relax. According to Conway, if you’re three days late with your mortgage repayment, this won’t be reported to the ICB. Where problems arise however, is when you go over 30 days, although even then such instances aren’t always reported to the ICB, which, it should be noted, is owned by lenders including AIB and Bank of Ireland.
“The anecdotal evidence is that lenders don’t always pass it on,” notes Conway, although he points out that where problems arise is where you are persistently late giving rise to 90-day delinquencies.
Indeed banks themselves have their own reasons for not passing on such information. Given the rapid deterioration of the economy, and the resulting decline in incomes, there are now many people who, under normal circumstances, would be able to pay their bills, but now find themselves unable to do so. If the banks can’t lend to them when the economy turns around, it will affect their business in the future.
“If too many people have marks on their credit reports then the banks won’t have too many people to lend to in a few years,” says Conway.
As such, it is perhaps no surprise that the Central Bank, in its recent report on banking supervision, recommended the establishment of a central credit register which would collate comprehensive data on the debts of consumers.
For Conway, the increasing sophistication of the Irish credit reporting system is inevitable, saying that the process is likely to become more automatic in the future, rather than being done at the behest of the lenders.
In the meantime, if you are struggling with your debts and are concerned about the impact this may have on your credit report, the advice is to repay your priority loans first.
“Mortgage delinquencies carry more weight so pay off your mortgage first, there will be much more serious repercussions if you don’t,” warns Conway, adding that some unsecured lenders, such as credit card providers, are particularly aggressive when it comes to collecting their money. However, you shouldn’t let their persuasiveness put you off making your mortgage payments.
If you are having problems meeting these repayments, remember that a bank will be loathe to offer you any sort of restructuring if you’re going to use that money to pay off another creditor such as a credit card provider. So prepare a detailed income and expenditure report to argue your case. And, if you’re looking for any sort of payment holiday or moratorium, remember to ask your lender how it will impact on your credit report.
Will they for example, report that as a violation or will they treat it as sticking to the terms of your mortgage contract? If you do find yourself in a position where your credit score has been hit, unfortunately there isn’t really anything you can do to rectify the situation. However, what you can do is ensure that it isn’t made any worse.
For Conway, there are a number of steps you can take in order to achieve this. Firstly, he advises that you engage with your creditors, asking whether or not any delayed or incomplete payments will be reported to the ICB as a delinquency or violation of contract. He also recommends that you stick within the limits set on your current account, and only use credit where necessary, in case you forget to repay it. Moreover, if closing an account you should always ensure that your direct debits move seamlessly to the new account – if not you could exceed the 30-day limit.
Lowe suggests that when seeking credit again you make every effort to be consistent with your repayments following any lapse, and to try and offer the lender some rationale behind your lapse, for example that you lost your job but are now in permanent employment again. However, this may not always work.
“Some will take it on board, but some won’t,” he says, noting that sub-prime lenders, who traditionally catered for those with poor credit histories, have now “gone to ground”.
