Oran Hall | Getting beyond a bad credit history

QUESTION: I was in a precarious situation, an external collector was called and everything was paid, but it’s on my permanent record. I am making money now and I’m okay with bus inesses. Whom do I need to pay to get rid of the bad credit and have it entirely behind me? I am not a criminal so I don’t need this on my record.

– Kim

FINANCIAL ADVISER: You have done well to turn around your financial situation to the point where you are out of debt and seem to have businesses, but you cannot wish away the fact that you have had an undesirable experience in financial matters.

The advent of credit bureaus has changed the landscape significantly for borrowers and lenders, so borrowers must take great care in how they borrow. People who borrow in situations in which their borrowing activity is captured in the assessment of their credit score should recognise that there is not going to be a dramatic change in their credit score the moment they liquidate their debt.

The standard is for a debt transaction to remain on the records of the credit bureau for a maximum period of seven years after the final payment is made. There are cases, I have been advised, in which it can be removed from the records before the end of that time, upon a request being made to the credit bureau by the lender, and this would depend on the circumstances surrounding the matter.

As long as the particular debt remains on your record it is factored into your credit score, so it does affect it. To the extent that you incur new debts and service them satisfactorily, your score and creditworthiness will improve.

I am surprised you raised the question of making any payment to have that part of your history behind you. The reality is that the past bad debt situation is real and is a part of your credit history. Before long, it will cease to affect your credit score.

It is true that you are not a criminal for not keeping to the terms you agreed to when you incurred the debt, but taking action to alter the situation could cause you to have some problems, so be patient. It is what it is.

It is important to service debts well and thereby establish a good credit score. Here are some of the benefits: greater access to loans and other credit facilities, the ability to access loans on more favourable conditions, including lower interest rates, and the increased likelihood of accessing loans without the need for guarantors and collateral.

It would be interesting to learn how you were able to turn around your situation. There are steps that can be taken to avoid falling into debt or that can be taken to correct an unfavourable debt situation. In the first case, making a budget and sticking to it are critically important, as is paying debts on time. In the latter case, it is important to speak to the provider of the credit facility if there are developments which may make it difficult to meet contractual payments, and seek to have the debt restructured.

Credit bureaus have made it relatively easy for consumers to have their full credit history in one place, which makes it easier to gain access to credit facilities as they are able to take their credit history with them from one lending institution to the other, and reduces the time required to process a loan or credit application to disbursement. On the other hand, borrowers with a bad history may find it difficult to access credit.

Some people try to help others by joining them in applying for loans and credit facilities. Such undertakings should be entered into very carefully for the facilitator could end up having to pay if the main borrower fails to honour the debt. It is, therefore, prudent to do proper screening before committing to such undertakings as far as possible.

A credit report carries the following: the value, term and payment history of a loan, collateral information, court judgments, enquiries about the borrower and demographic information on the borrower.

Credit bureaus are provided with such information by financial institutions like commercial banks, credit unions, building societies and securities dealers, the Students’ Loan Bureau, companies which sell under hire purchase arrangements, and the National Housing Trust.

You have illustrated that there can be life after debt, but even after the debt has been liquidated, it can be a millstone around your neck or a monkey on your back, whichever you prefer, for up to seven years if the creditor is a provider of credit information to a credit bureau.

Oran A. Hall, author of ‘Understanding Investments’ and principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and counsel. Email finviser.jm@gmail.com.