We are all aware of the adverse listings on a credit file that automatically make it harder for your client to get a loan. Overdue accounts (also called defaults), court actions (whether paid or unpaid), late payment indicators and excessive recent inquiries will negatively impact your client’s credit score.
But there are some other potentially adverse listings that no-one really talks about that might also affect your client’s ability to get credit. These are inquiry listings or credit contracts with certain types of credit providers. These listings are a big red flag to prospective lenders.
Probably the biggest one is the mention of a payday lender on your client’s credit file. Payday lenders loan small amounts of money at very high interest rates to consumers (just think Nimble) who have a short-term cash crisis. We have probably all read about cases where a short-term cash crisis becomes a long-term crisis – when the interest rates and fees that payday lenders charge ensure that the consumer can never quite pay back the loan, and they have to keep accessing payday loans to survive.
If a lender sees a payday lender’s name on a credit file, this might create a problem with getting a loan. This is because some lenders see the fact that your client has taken out a payday loan as a sign that their finances are under pressure. Because lenders’ assessment systems are built by modelling actual customer data, if a particular lender’s experience is that customers who take out payday loans are more likely to miss their repayments, this will be reflected in their credit scoring.
Another red flag for lenders are inquiry listings made by credit repair companies. You may wonder how a credit repair company’s name could appear on a credit file – they can, because some (definitely not all) credit repair companies are credit providers because they also write high-interest loans. The scenario usually goes something like this: your client sees an advertisement for credit repair and calls the company. The credit repair company offers to get a copy of your client’s credit file – “for free” – but the catch is that by the time your client receives the credit file, there is already an inquiry listing placed on the file by the credit repair company. These types of listings are not favourable to your client in terms of lenders’ credit scoring for the same reasons that payday lenders’ inquiry listings are not favourable. In other words, that “free” credit file might end up costing your client a low-interest loan.
So, some words of advice: when choosing a credit repair company, be careful to select one that does not use the phrase “credit repair” as click bait to sell high-interest loans and unnecessary debt agreements. Advise your client that if a credit repair company offers them a free credit file, to ask them if it will leave an inquiry on the file. And if it does, keep looking for a credit repair company that does not leave a footprint, and will put your client in a better position to get low-interest finance after dealing with them.