Every once in a while, applying for some form of credit is necessary. For example, if your washing machine breaks and you have work clothes and school uniforms that need washing – this would be classed as a financial emergency, especially if you’d exhausted all other options of help from your savings, or friends and family. However, it’s important to act responsibly and only take out credit when you really need it.
When you apply for a short-term loan or any other type of credit, the lender will check your creditworthiness and affordability by performing a search on your credit file. Most lenders will do a soft search first and only complete a hard search one you are ready to complete your loan. You can still be declined after a hard search, however, so it is important to be open and honest in your application. Other lenders can see hard searches that you’ve made for credit so, if you’re declined by one lender after they do a hard search, it is a good idea to wait a while before applying elsewhere.
If you apply for credit and you’re approved, the hard search will show on your credit file along with an ‘open’ status against your loan. This will remain until you repay your loan in full. Taking out a loan will have no negative impact on your credit file and rating if you make the agreed repayments on time, in line with your payment schedule.
Problems arise when you begin to miss repayments and don’t reach out to your creditor to arrange an alternative agreement regarding your payments. It’s really important to contact your lender as soon as you think you might need to miss a repayment. Ignoring the situation is the worst thing you can do. When you miss a repayment, your credit file will be updated to ‘overdue’, which other lenders can see. It shows them that you’ve failed to meet your agreed responsibilities. When left overdue for some time, your lender may record a Default on your file. A Default is a red flag to future creditors and will stay on your credit file for 6 years, so it’s important to avoid getting to the Default stage if you can.
Contacting your lender to discuss your change in circumstances can feel daunting and stressful, but they will want to resolve the situation just as much as you do. They will work with you to arrange a fair resolution that you’re both happy with. After all, having an overdue and unpaid loan on their books isn’t great for business either. They might be able to offer you a temporarily reduced payment plan to help with the situation. Whatever you do, don’t put off getting in touch with them as soon as you can.
