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Trapped by Poor Credit Rating: A Case Study

By: Kevin Dowling BA (IMC) - Updated: 17 Sep 2012 | comments*Discuss
Poor Credit Rating Mortgage Cards Debts

In this case study we look at the problems a couple have encountered because of their poor credit rating. Elaine, 32, explains.

“Around a year ago myself and my husband Dan found ourselves struggling with our debts. Dan is an IT contract worker and the company who employed him decided not to renew his contract. We had been struggling to repay our mortgage and the credit card bills were mounting up so we decided to downsize our house to reduce our outgoings.

“My husband had missed a couple of credit card payments – being a contract worker he didn’t receive any redundancy money when he was let go – which affected his credit rating. As a result, even though our plan to downsize would have cut our mortgage payments by as much as two thirds of what we were currently paying, the bank refused to lend us the money for the new mortgage.”

When Lack of Credit Leaves People Trapped

The situation that Elaine and Dan found themselves in is not an uncommon one. Having accumulated debts and missed some repayments, a poor credit rating meant their attempts to improve their financial situation were being hampered by lenders refusing to offer them any more credit.

Elaine goes on: “Our bank has been so unhelpful. It seems they would prefer us to remain in debt and keep teetering on brink instead of offering us the assistance we need to repay our debts and get financially straight again.

“We are now unsure what to do next, whether we should keep applying for a mortgage with other lenders or just sell our house, rent a property and pay off all our debts. If we do this, will we be able to repair our credit rating and get a mortgage more easily in the future? Should I try and apply for a mortgage myself and keep my husband’s name off the application? What are our best options?”

Debt Advice

We contacted the National Debtline who offered their thoughts on Elaine and Dan’s options. They pointed out that once a missed payment on an account is recorded it will remain on a credit reference file for a six year period.

If the debts are in joint names, then both Elaine and Dan have what’s known as ‘joint and several liability’ for the debt, which will be flagged on both their credit reports. This means that until the debt is cleared in full, both are considered to be individually liable for the entire remaining balance of the debt.

As a result, there’s a strong possibility that even if Elaine applied for a mortgage without naming Dan on the application, her application would still be refused for the same reasons as the first application was; namely Dan’s missed payment history.

If a husband and wife are financially linked, through a shared address and joint bank accounts, then lenders are legally allowed to take both credit histories into account, even if the application only mentions one person.

Debt Solutions

The National Debtline also pointed out that they do not recommend turning unsecured debt (for example credit cards and unsecured personal loans) into secured debt (mortgages and secured loans). This is because it would mean that assets such as your home could be repossessed if you weren’t able to make the repayments.

Before Elaine and Dan decide to sell up and rent a property, they should consider the alternatives. They could attempt formal negotiations with their mortgage lender and credit card providers, explaining Dan’s change in circumstances and attempt a reduced payment arrangement.

Some lenders will agree to freeze interest and charges on existing debts, allowing you to pay off the balance and give you a bit more breathing space.

Alternatively Elaine and Dan might consider a debt management plan or an individual voluntary arrangement, whereby their debts will be negotiated and a formal repayment plan can be agreed.

A poor credit rating can be a major impediment to making life changes such as moving home. The good news is that after a period of six years Elaine and Dan will be able to repair their rating and the likelihood of them being able to obtain a new mortgage will be greatly improved.

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