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Taking care of your debts and credit score

Financial Wellness

Financial Wellness - Fidelity

While debts may get a bad rap, not all debts are equal. Even so, paying off debts is a priority for many and found to be in the top two tasks listed on people’s financial to do list2 . Knowing which you should prioritise is essential if you want to keep your financial integrity and your credit rating in good shape.

Here’s what you need to know when it comes to prioritising paying what you owe and boosting your credit score.

Know your debts

Priority Debt - carry heavier sanctions, so you should make these your priority. Top of the list should be Council Tax. Fail to pay and you could face serious sanctions.

Secured debt - is money that is secured against collateral, like your home or your car. This means that if you stop your repayments, you face losing the goods themselves. So they are priorities when it comes to keeping up with repayments.

Unsecured Debt - like credit cards, are riskier for lenders, as they have no certain way of getting their money back. That is why you’ll pay a higher interest rate for the privilege of borrowing money. Fail to make payments and you will typically pay up to 20% a year on the money you borrow.

Student Debt - is a very low priority debt. Those who take a student loan will start to pay it back once they begin earning over the threshold amount and repayments continue until they have repaid the loan (and accrued interest) or until 30 years has passed - whichever comes sooner.

Boost your credit score

Regularly check your credit score - you can check credit files held on you by getting a credit report from any of the UK’s main three credit bureaus - Equifax, Experian and Transunion- or from one of the third-party agencies that use their data. When you get hold of your report, make sure you check it, thoroughly.

Correct any mistakes - if you find any errors, tell the credit agency immediately. The credit agency is legally required to review any issues you raise. Any negative information should only remain on your record for six years, so make sure it’s up to date.

Get on the Electoral Roll - make sure you are registered at your current address. If you are not it can cause delays when you apply for credit; some firms may turn you down if they can’t confirm your address.

Be a good borrower - every missed or late payment, whether it’s on your mortgage, credit card, personal loan, or even mobile phone or utility bill, will show on your credit file for six years, so make sure you pay on time. Set up a direct debit so you don’t miss payments.

Make yourself more attractive - prospective lenders look at your history of repaying previous debts as a way of indicating your ability to repay new borrowing. If you have no prior history to point to, there are credit builder products available. These products tend to attract higher rates of interest, but if you clear the balance in full each month that shouldn’t be too much of an issue.

Take care with joint accounts - your ability to obtain credit may be affected by who you are financially associated with. If you have a joint credit account or a mortgage with a spouse, partner, friend or family member, then you are what is known as ‘financially associated’ with them.That means that their credit rating reflects on yours, and vice versa. If you no longer share a financial connection with that person then you should make sure your credit histories are also separated.

Next steps

See how much extra monthly income you have to pay off debt with our Managing Your Debt Activity Sheet.

If you’re struggling with debt repayments, it’s important to speak up and get help. You can get free and impartial advice from the Government’s MoneyHelper service.

Important Information

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. This information does not constitute investment advice and should not be used as the basis for any investment decision, nor should it be treated as a recommendation for any investment or action. You should regularly review your investment objectives and choices and if you are unsure whether an investment is suitable for you, you should contact an authorised financial adviser.