Trust Deeds are one of the most useful debt solutions available if you need a sensible way to tackle a burden of debt that threatens to overwhelm you. But many people worry about the affect it will have on their credit rating. But what is a credit rating and why do people worry – often unnecessarily – about what can happen to it?
What Are Credit Ratings?
Three thousand years ago, financial lenders used clay tabs to keep track of who owed them money but there was very little to help them keep track of how likely a debtor was to pay back what they owed. Today our credit rating system does that job.
It helps lenders estimate the credit worthiness of a borrower based on their lending history– have they ever had a Trust Deed, been sequestered or defaulted on a payment? Are they carrying to much debt? Each credit event is listed.
The lender then ‘scores’ that borrower against a wish-list of what they consider a perfect creditor to be, with points added or deducted for various factors such as:
- The amount of credit the borrower has
- Their spending patterns
- Their current level of debt
- Any defaults they have made on credit payments
- The interest rate they are being charged
How Are Credit Ratings Collected?
Lenders do not hold all this information themselves. Instead credit reference agencies collect the information and lenders ask them for it when a borrower applies for credit. However, even if the information collected reflects the fact that the borrower has a good credit history, it doesn’t mean they will be granted credit.
How Do Lenders Use Credit Ratings?
Lenders are not looking for someone who borrows little and pays everything back in full. While it sounds odd, such a person is not considered the ideal customer. More and more financial institutions use credit ratings to see if there is the potential to make money from the borrower.
For example, one lenders ideal customer might be someone who owns their own home, carries a balance on one or two credit cards but who always pays what they owe on time.
They would be considered a good bet to lend money to because they would generate money for the lender in interest payments, and there is a good chance they will not default.
But there could come a point when that borrower turns into a risk if they cannot keep up with their payments.
What Effect Do Trust Deeds Have On Credit Ratings?
There is absolutely no doubt that Trust Deeds have a negative affect on credit ratings. It’s a sign you have asked a professional to manage your creditors, and you will therefore be considered a bad risk by lenders.
However, it is important to consider just how your existing debt will be affecting your credit rating in the first place. If you are applying for a Trust Deed you are probably having serious financial problems anyway which will be apparent to a lender from your credit score.
You may have defaulted on payments already, or it will be clear that your debt payments are very close to exceeding your income so it will only be a matter of time before you default.
If you do manage to keep going by using all the credit you can obtain, eventually you will have used up all of your available credit and won’t be able to get any more. You will have hit a point where your credit score reflects that you are in trouble and the lenders will refuse your applications.
This is often the point most people are at when they start to look into getting a Trust Deed.
What Happens To Credit Ratings After A Trust Deed Is Complete?
For several years afterwards, the Trust Deed will be on your credit record for lenders to see and getting credit will be very hard. This might not bother you – you might have decided to avoid credit after it ends.
However, if you want to obtain credit in the form of a mortgage, you will need to spend time rebuilding your credit record.
For many, the loss of a credit rating doesn’t compare to the benefits of a Trust Deed. No more stress, no more creditors hassling you, and after four years, a debt-free future to look forward to.
Trust Deed Example
Example Unsecured Debts
|2||Credit card 1||£6,812|
Your Monthly Repayments Would Be
a Scottish Trust Deed £748
(total contractual repayments)
a Scottish Trust Deed £295
(total contractual repayments)
* Subject to creditor acceptance
* Payment subject to individual circumstances
* Credit rating may be affected
* Fees apply, subject to individual's circumstances. For more information on our fees click here