A credit report presents key financial information to support a lenders decision-making process regarding lending money, extending credit, and setting a credit limit.

If a borrower defaults on a payment or a creditor seeks debt enforcement action, how does this impact credit score?

The impact of debt enforcement on credit score

As the information in a credit report is used to calculate a credit score, any positive changes, such as a substantial and consistent reduction in debt levels can improve a credit score. In contrast, negative records, such as debt enforcement can harm a credit score.

Debt enforcement typically shows that an individual is cash poor as they have defaulted on a loan which raises a red flag to lenders and creditors. Negative entries remain on a credit file for six years which can have a long-term impact on the financial position and borrowing potential of the borrower.

What are negative entries on a credit record?

Negative entries on a credit report include missed payments, loan defaults, accounts in collection, court judgments, settlements, debt solutions and court action.

Accounts in collection

These are debts transferred to a debt collection agency as they are in default. They negatively impact a credit score and remain on an individual’s credit record to show that payments have been missed. Creditors may appoint a third party or a collection agency to collect the debt or sell the debt to an agency if previous attempts at collecting the debt have proved unsuccessful.

Accounts in collection show that the borrower has failed to make payment which could indicate deeper problems, such as possible insolvency (for businesses) or bankruptcy (for individuals). This information is valuable to lenders as it paints a detailed picture of a borrower’s attitude to borrowing, repayments, and red flags.

Court judgment

A County Court Judgment (CCJ) is an official court order a creditor will request to order payment from a debtor. Before a claim is issued, the creditor must attempt to collect the payment or come to an agreement. If this fails, a warning letter or default notice must be issued, notifying the debtor that unless payment is forthcoming, the creditor will proceed with legal action in the form of a County Court Judgment.

The CCJ will be recorded at the Register of Judgments, Orders and Fines and on the credit file. If it is paid within 30 days, the debtor can apply for it to be removed, otherwise, the record will remain on the credit file for six years.

Bankruptcy

Bankruptcy is recorded on a credit file for six years, or until the party is discharged. The Scotland equivalent of bankruptcy is Sequestration. This is the same for other forms of debt relief.

Debt enforcement can seriously restrict access to basic financial products, such as a loan, mortgage, credit card, and bank account, and drastically injure a credit score due to the high level of risk involved.

Our thanks to guest author Sharon McDougall of Scotland Debt Solutions (part of Begbies Traynor Group).