MANAGING DEBT

Debt is a fact of life. Debt comes in many shapes and forms including mortgages, personal loans, overdrafts, credit, debit and store cards, and hire-purchase (HP) agreements. Even if you manage to avoid any of these necessary evils, you are likely to be in debt to the telephone company, the utility companies, or your local authority. Each time you require new credit-to secure a mortgage or if you request a new credit card, for example-the provider of the finance will want to assess what kind of risk you represent, and whether you will pay off your debt. To help make their decision, they will try to find out as much information about you and your money as possible. A key factor will be your credit reference file. Computer records held by specialist credit reference agencies contain a huge amount of information on your current financial affairs, and how you have managed your finances in the past.

Read on to find out more about credit reference files, how you can access the information, and the action you can take if any of the details are incorrect. We also look at what you should do if you get into difficulties and fall into arrears on a debt, and we focus on the many organisations that are available to provide valuable help and advice.  Please use the 'quick links' below to access the sections of interest.

Checking your credit rating
How does credit rating work?
Checking the accuracy of your credit rating
Obtaining a copy of your credit rating
Correcting inaccurate information
County Court Judgements (CCJs)
Credit refusals
Useful addresses & telephone numbers Handling arrears
Dealing with your creditors
Getting your priorities right
Going to court
What not to do
What to do
Agencies that can help out
Citizens' Advice Bureaux
National Debtline
Consumer Credit Counselling Service
Tax Aid
The courts
Summing up
Where to find help
Citizens' Advice Bureaux
National Debtline
Consumer Credit Counselling Service
Tax Aid
The courts
Summing up
Understanding credit files
Information held by credit reference agencies
How application forms are assessed
Credit scoring
What to do if you are turned down
Student debt
Here’s a few tips for life after uni
Disclaimer

Checking your credit rating
Each year, tens of thousands of people's applications for loans, mortgages, credit cards, or hire purchase are rejected, following a credit reference check by the service supplier.

In many cases, the decision to turn down a request appears incomprehensible: the individual concerned may well have a perfect debt repayment record. Or they may already own several credit cards, none of which are up to their spending limit and on which balances are faithfully paid in full every month.

How does credit rating work?
There are two main credit reference agencies in the United Kingdom which carry out this activity: Nottingham-based Experian, and Equifax, in Glasgow. Between them, they carry details on 44 million people in the UK. Their data banks include details about your family, credit cards, mortgages, and information on any unpaid bills, failure to pay hire-purchase debts, or County Court judgements (known as CCJs) against you - although they will not appear if paid off within one month. If paid off later, the file can be marked "satisfied" but the information will be on file for six years.

Credit reference agencies will also look at the electoral roll for your address to see how long you have lived there, plus the financial details of every adult with the same surname at that address.

Other available information, supplied by organisations with whom you have financial dealings, details how you handle the credit accounts you already have. It is updated monthly to show whether you keep payments up to date. There will also be a record of enquiries made on your name over the past one or two years, not all of these for lending purposes.

The presence of multiple enquiries, or "footprints" against your name - irrespective of whether a loan or a card application was actually proceeded with - can sometimes be taken to indicate that the individual concerned is a potential "bad risk".

Checking the accuracy of your credit rating
Given the multiplicity of these sources of information, it would be rare if a mistake were not made. Equifax, however, claims that out of the 650,000 requests it receives annually from people who wish to see their files - out of 65 million reference requests each year - fewer than one per cent find any inaccuracies.

Be that as it may, inaccurate details-or, better put, details that are no longer accurate-are a major reason why people can be refused credit. So how can you make sure that the information kept on your file is accurate?

Everyone has statutory rights in this regard. These rights were formerly enforced by the Office of Fair Trading (OFT), but a change in law means that responsibility is passing to the Information Commissioner.

When the Data Protection Act is fully in force in October 2001, individuals will have the right to see all information about themselves, whether it is on computer or not, and to have incorrect records amended.

But under the 1974 Consumer Credit Act, it is already possible to ensure that credit-linked information is accurate. Anyone refused credit for £25,000 or less may write within 28 days to whoever has refused, asking the reason why and the name of any credit reference agency consulted.

While it is not mandatory to give a reason for a credit refusal, the name and address of any agency used must be supplied within seven working days. Section 158 of the Act says you can ask the named agency for a copy of your file. The agency must send a copy of the information or tell you if it has no file.

Obtaining a copy of your credit rating
Both Equifax and Experian will supply you with all details on your file, as long as you send them a cheque or postal order for £2, a fee determined by the OFT, plus your full name and current address. If you have lived there for less than six years, you should include all your addresses over that period.

Among the commonest problems encountered by people who check their files is one where two people with the same surname, but with different credit records, for example a father and a son, live at the same address.

Also, lenders assume that everyone living in a household with the same surname, are financially connected or dependent. If you can show that your finances are not connected to the other person or people in question, then you can ask for a "Notice of Disassociation" to be placed on your file.

You will need to give the full names and addresses of those involved, and the nature of the relationship you have with the people you want to be disassociated from.

Correcting inaccurate information
If the information is simply wrong it should be removed from the file. In other cases, you are allowed to provide a 200-word statement, called a "Notice of Correction", which will be added to your file. For example, if you had a CCJ issued against you when you were unemployed then you could explain this in the notice.

Reference agencies must send copies of corrections to anyone who has asked for information about you during the past six months. They must also use the corrections in future.

If credit denials have become endemic, it is better to make sure that the mistake's originator corrects it with the agency concerned and then sends you written confirmation of that correction. If you make the correction yourself, you will need to offer proof that an error has been made in your file before it is changed.

County Court Judgements (CCJs)
If you have had a CCJ issued against you, after the bill has been paid, it is possible to obtain a "Certificate of Satisfaction", which lets institutions know the bill has been paid, although the judgement remains on the credit file for six years afterwards. Should the CCJ have been put on your file erroneously, then you must go back to the firm that originally brought the CCJ and ask them for a "Certificate of Cancellation".

When this is done, the Certificate goes back through the Registry Trust, part of the Lord Chancellor's department, and is sent to the credit reference agencies who will then remove it from their files.

A CCJ can also be removed via a Certificate of Cancellation (or Proof of Payment, in Scotland) if the debt is paid within one month. There are a number of firms which promise to ensure "cancellation" of CCJs from files, for payments of between £50 and £100. In nearly all cases, this is a waste of money for something which you can do quite easily yourself.

Credit refusals
Even if you succeed in correcting any errors and omissions in your files, and disassociate yourself from others with a bad credit history, this does not automatically mean you will obtain credit.

This is because while all lenders will use information supplied to them by reference agencies, they each make their own individual assessment as to whether to grant credit. One lender's willingness to offer a £5,000 limit on a card can sometimes be matched by another issuer's unwillingness even to offer one.

Before deciding whether or not to give you a loan, most companies will put your financial details through their own credit "league table". People who own (or are buying) their own home score higher than those in rented accommodation. And having lived at the same address for years is much better for your credit rating than having moved around.

Being married, having a credit card, and having held the same job for several years are also likely to earn you high points. Age is also important. Generally, the older you are, the more the lender likes it.

Useful addresses & telephone numbers
If you would like to obtain copies of your personal credit file, write to: Experian, Consumer Help Service, PO Box 8000, Nottingham NG1 5GX. Alternatively, a recorded message on 0115 976 8747 will explain how to obtain a copy of a credit file from Experian. Further information is available on the agency's website www.experian.co.uk.

Equifax, Department 1E, PO Box 3001, Glasgow G81 2DT. Its consumer helpline number is 0990 143700.

The Office of the Information Commissioner has an information line - call 01625 545745. You can email them at mail@dataprotection.gov.uk or write to them at Office of the Information Commissioner, Wycliffe House, Water Lane, Wilmslow, Cheshire SK9 5AF. Their website can be found at www.dataprotection.gov.uk. You can also get a free leaflet if you have been refused credit by calling 0870 442 1211.

The Data Protection Registrar information line: 01625 545745.

Consumer Credit Counselling: 0800 138 1111

National Debtline: 0808 808 4000

Handling arrears
It pays to take control of your debts before they become unmanageable, and to take action sooner rather than later. If your debts are mounting up, take a look at both sides of your finances-income and expenditure-and try to draw up a plan. Then put it into action. You may be able to:

See whether there is any scope to earn more money.

Do additional work at weekends or in the evenings.

Rent out a spare room.

Sell anything you do not need.

Controlling your expenditure & reduce your outgoings.

It should go without saying that you must cut out all luxuries, but see whether you can go further. You will need to be ruthless, but the quicker you clear your debts, the better. If you have goods on hire purchase and have made half the payments, return the items, since if you are up to date with your payments, you will not owe any more money.

Dealing with your creditors
Show all your creditors your budget and plan of action, and make them an offer. Ask them whether they will accept reduced payments for a period while you put your affairs in order. See whether they will delay charging interest while you clear the debt. Make regular payments, even if they are smaller than demanded. This shows evidence of your intent, and is more likely to gain sympathy from the creditor than paying nothing at all. If you come to agreement with one creditor, write to others with details. They may also agree to a compromise about payments, or freeze interest for a period. The golden rule is not to hide from your problems and to be proactive-draw up your own budget, stick to it, and always make small payments, even if the company does not agree to your plan.

Getting your priorities right
Some debts are more important than others are. Make sure you pay your Council Tax. Also try to maintain mortgage payments, as failure to pay will hit your credit ratings for years afterwards, and prevent you from obtaining a mortgage again. Water, gas, and electricity are essentials, so negotiate with the utilities. Provide your plan of action to all other creditors, making sure that you stick to it. Finally, make sure that you keep copies of all correspondence. If you end up going to court, this evidence could prove vital.

Going to court
If you receive a "default summons", the creditor is taking you to court. Make sure you fill in and return the form that comes with it, including your plans to repay the debt, detailing the sums you will pay and when. Be up-front and provide exhaustive details of your finances. Be positive; going to court could work in your favour, since interest on your debt will be frozen, and the order may result in lower payments than the creditor is demanding. The court costs will, however, be added to your debt, and unless you pay off the full amount immediately, the judgement against you is kept on file for six years. Finally, if the court orders a regular payment, make sure you stick to the payments. If at any time you believe you cannot keep them up, go back to the court in advance and see whether you can negotiate new, lower terms.

What not to do
Do not borrow more money at higher rates of interest to clear debts that you cannot afford. Do not draw up an unrealistic budget. Try to avoid bankruptcy.

What to do
Draw up a budget, and stick to it. Keep your creditors informed in advance of any changes to your plans or agreed payments. Get advice: there are a number of sources of good, free advice to take before, during, and after you have to go to court.

Agencies that can help out
The good news for borrowers is that there are a variety of organisations that provide advice on debt, offering help before, during, or after you get into difficulties. Many of these services are free of charge. If you are concerned about your finances, take advantage of the advice that is available.

Citizens' Advice Bureaux
There is a good chance that you will find a Citizens' Advice Bureau (CAB) near you, since there are over 1,700 offices throughout the country. Look in the telephone directory for the number of your local office. Otherwise, check out the CAB's Web site, which provides information and a directory of local CABs: www.adviceguide.org.uk

The CAB offers free advice and a range of useful booklets. Specialists at their Money Advice Centres will help you draw up your budget and action plan, and may negotiate on your behalf with the organisations you owe money to.

National Debtline
Ring 0808 808 4000 for free advice and help in drawing up a budget and an action plan to help you deal with your debts.

Consumer Credit Counselling Service
The Consumer Credit Counselling Service (CCCS) will help anyone who has problems with their debts. There are a number of regional offices which you can telephone for an appointment: call free of charge on 0800 138 1111. Major banks and building societies fund the CCCS, but their service is entirely independent and free of charge. The CCCS insists that you are completely open about all your finances, since it will seek to negotiate deals with the finance companies on your behalf. You will have to make monthly payments to the CCCS, which it will distribute to your creditors, and it will handle correspondence on your behalf. The CCCS website can be found at www.cccs.co.uk

Tax Aid
If you have problems with the Inland Revenue, call Tax Aid on 0207 624 3768. This charity will help you if you cannot afford an accountant.

The courts
The courts are there to help and will try to find a solution that suits you as well as the company you owe money to. Check the telephone directory for your local county court, as you will be able to get a free booklet explaining the legal process in simple-to-understand terms.

Summing up
It makes sense to face up to financial problems as soon as possible in order to start sorting them out. Even if you have reached the stage where you are being sued, try to be positive, as there may still be solutions. There are plenty of sources of good, expert, and free advice. It pays to get on the telephone and take advantage of the help that is available.

Where to find help
The good news for borrowers is that there are a variety of organisations that provide advice on debt, offering help before, during, or after you get into difficulties. And many of these services are free of charge. If you are concerned about your finances, take advantage of the advice that is available.

Citizens' Advice Bureaux
There is a good chance that you will find a Citizens' Advice Bureau (CAB) near you, since there are over 1,700 offices throughout the country. Look in the telephone directory for the number of your local office. Otherwise, check out the CAB's Web site, which provides information and a directory of local CABs:

The CAB offers free advice and a range of useful booklets. Specialists at their Money Advice Centres will help you draw up your budget and action plan, and may negotiate on your behalf with the organisations you owe money to.

National Debtline
Ring 0808 808 4000 for free advice and help in drawing up a budget and an action plan to help you deal with your debts.

Consumer Credit Counselling Service
The Consumer Credit Counselling Service (CCCS) will help anyone who has problems with their debts. There are a number of regional offices which you can telephone for an appointment: call free of charge on 0800 138 1111. Major banks and building societies fund the CCCS, but their service is entirely independent and free of charge. The CCCS insists that you are completely open about all your finances, since it will seek to negotiate deals with the finance companies on your behalf. You will have to make monthly payments to the CCCS, which it will distribute to your creditors, and it will handle correspondence on your behalf. The CCCS website can be found at www.cccs.co.uk

Tax Aid
If you have problems with the Inland Revenue, call Tax Aid on 0207 624 3768 between 10am and 12 noon, Mondays to Thursdays. This charity will help you if you cannot afford an accountant. Its website can be found at www.taxaid.org.uk

The courts
The courts are there to help and will try to find a solution that suits you as well as the company you owe money to. Check the telephone directory for your local county court, as you will be able to get a free booklet explaining the legal process in simple-to-understand terms.

Summing up
It makes sense to face up to financial problems as soon as possible in order to start sorting them out. Even if you have reached the stage where you are being sued, try to be positive, as there may still be solutions. There are plenty of sources of good, expert, and free advice. It pays to get on the telephone and take advantage of the help that is available.

Understanding credit files
All credit providers want to minimise the risk of customers defaulting on payments before making finance available. It is not in the customer's interest to get into debt if there is little or no chance that they can repay the finance.

Finance companies have four main ways to assess the risk you represent: your credit file; the details you have included on the application form; previous dealings you have had with them (if any); and credit scoring.

Information held by credit reference agencies
Credit reference agencies keep data on over 40 million people and 24 million addresses, so there is a good chance that your details will be held on file. The information contained will cover most of your financial details going back a number of years.

If you have had a county court judgement (CCJ) or a "decree" in Scotland registered against you in the last six years for non-payment of a debt in the past, this will be recorded, even if you have paid off the arrears (or "satisfied" the CCJ).

Mortgage lenders keep a register of people whose homes have been repossessed or who have handed their keys in and walked away from a debt, and this information is supplied to the credit reference agencies.

Other information filed includes your credit card payment history, details of overdrafts, as well as details of payments on mortgages, and some utility bills.

Many organisations subscribe to the credit reference agencies and pool information since they want to minimise the risks involved in making credit available to new customers. One of the most useful methods of assessing whether a customer will repay any debt is their past history.

If this sounds like "Big Brother", remember that if someone defaults on credit repayments, the loss has to be recovered from other customers through higher interest charges. It benefits all customers if credit providers identify the people who are bad credit risks.

It is not just yourself who is under scrutiny; your file may contain details on other people. In order to create a full picture of you and assess the likelihood that you will repay credit, your file may contain details on anyone who currently lives or has lived with you at your present or previous addresses. "Anyone" includes your family (same surname) or anyone else with whom you share a financial connection.

How application forms are assessed
When applying for credit you will have to complete an application form. The lender may refuse credit on the basis of the completed form if you do not fit their criteria, and will not bother to check your credit file. This may be because you are too young, do not earn enough, or have not worked in continuous employment for long enough. If you are under 21, looking to borrow more than three times your income, and have not been working for at least six months, you are unlikely to get a mortgage on all three counts.

Previous dealings - If you apply to, for example, a bank for a credit card, but you have had a bad payment record or defaulted on a loan in the past, the company is unlikely to offer you new credit.

Credit scoring
Most lenders operate their own system of assessing the risk you represent, which is called credit scoring. They will award you points according to a formula based on their experience of previous borrowers, and the more points you score, the more likely they will be to offer you credit.

The things looked at vary according to the lender, but people who are married, own their property and have been at the same address for more than three years are generally deemed good risks for credit. On the other hand, single people in rented accommodation who move regularly are likely to lose points. Your income and existing debts will also be taken into account.

Credit scoring might also incorporate the information on your credit file, depending on the lender concerned.

What to do if you are turned down
Lenders do not have to tell you why they have refused credit, although industry guidelines recommend they give you a broad outline of the primary reason. They may confirm that it was because you failed to score enough points in the credit-scoring process, or because you have had a poor record in the past. If so, ask them to reconsider, although you may still be refused credit.

If you are turned down because of poor credit reference information, then you should ask to see your file and find out whether the information is correct. This is not a difficult or expensive process - all is explained in the Money article called "Checking your credit rating".

Student debt
You’ve had the time of your life at university and, hopefully, got a good degree as well. However, according to a recent survey by NatWest, this is where the fun seems to stop. The survey shows that the average student debt has now risen to £10,000, up from £6,700 in 1999.

The good news is that many graduates starting work in London and East Anglia can command between £20,000-£25,000 per annum and the average graduate salary across the UK is now £13,422. But don’t forget those things like rent, food and bills that you’ll need to pay for when you get your first job. So what’s the best plan of attack to start chipping away at the pile of debt – student loans, overdrafts, personal loans, credit cards - you’ve accumulated at university?

Here’s a few tips for life after uni:

Repay the debts that have the highest interest rates first

Make a realistic budget plan when you get your first job – and stick to it

Make sure you’re not paying more tax than you should be

Investigate what graduate packages your bank offers

Try and start saving, it’s never too early to begin looking at a pension plan

Above all, if you are worried about the state of your finances, talk to someone – your bank, a debt advisory helpline or your parents

Disclaimer
Please note that articles on this site do not constitute regulated financial advice, which recommends a course of action based upon the specifics of your personal circumstances. The articles are intended to provide general personal financial information. We urge you to consult an Independent Financial Adviser (IFA) before making any important decisions about your finances. Call 0117 971 1177 for details of three IFAs in your local area.Any statement regarding financial services products and tax liability is based on legislation and tax practices as at 1 January 2003, which is, of course, subject to change.The value of any tax benefits or reliefs depends upon the individual circumstances of the investor.When investment performance is mentioned you should remember that past performance is no guarantee of future performance. Where products have an underlying investment content, in many cases the value of the investment can fall as well as rise. For with-profit based investments, there is no guarantee as to the level of bonuses that will be declared, if any. Where mortgages or secured loans are explained do remember that your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it. All mortgages are subject to underwriting, status and are not available to people under the age of 18.