Three ways your credit score could be ruined due to coronavirus – and how to avoid it
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BORROWERS' credit scores could take a hit if they take up emergency measures to help their finances during the coronavirus outbreak.
Banks and building societies are offering a raft of support - including three-month mortgage holidays and increased overdrafts.
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But while your credit score will be safeguarded under new rules when taking out some of this help, not everything is covered.
The UK's three credit reference agencies, Equifax, Experian, and TransUnion have agreed to a special measure called an “emergency payment freeze".
This means, where you agree a repayment holiday or payment freeze with your lender or you temporarily reduce repayments this won't affect your credit score.
But where you take out new credit or add to your existing borrowing this is likely to be reported to credit reference agencies as usual.
And this could have a negative impact on your score.
We outline three key scenarios that could result in your credit score taking a hit - and how to avoid them.
1. Missed payments that haven't been agreed to
Unless your lender has agreed to a payment break, missing repayments or cancelling direct debits is likely to have a negative impact on credit scores and could affect your chances of getting credit in the future.
And this applies even if you can't get through to your lender to arrange a repayment holiday.
You can also check your credit score for free using the following third parties:
- ClearScore: ClearScore uses Equifax's data to forever.
- MoneySavingExpert.com: This tool uses Experian's data to forever.
But Mr Jones explains that one new check won't ruin your score - it's only if you're making more than one application in a short time frame that this will have an impact.
To avoid this, Mr Jones said: "We would encourage people to limit and spread out applications for new credit.
3. Increasing existing credit card and overdraft limits
Any change to a credit limit, such as on an overdraft or credit card, will be reflected on your credit report.
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It's slightly different for credit cards though, as here, Mr James says credit reference agencies compare the limit to your balance to help determine your score - as well as looking at how you heavily you use your card.
So doubling your credit card limit but maintaining the same level as debt is likely to have a positive effect on your score, says Mr Jones.
But increasing your limit and quickly using it will have the opposite effect.
Many of the major lenders have introduced automatic increased interest-free overdraft buffers as a result of coronavirus.
These will apply automatically where people already have an overdraft, but HSBC and Santander told us if you increase your overdraft limit it will pass this information on.
Lloyds Banking Group confirmed overdraft increases won't, however, impact your score.
We'll update this story as soon as we get any more responses.
In the meantime, think carefully before using any increased balance.
If you do, bear in mind you should try to pay it off within the interest-free period otherwise you could be stung by hefty interest charges once over.
Having a poor credit score can push up your bills - motorists could be paying up to £1,100 more a year for their car insurance because of it.
It can also add £262 a month to your mortgage repayments but there are ways that you can improve it to get a better deal.
But Monzo customers will soon be able to check their credit score for free on the app.