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What Are The Differences Between Good And Bad Debt?

Written by Alex Swindells on . Posted in Credit Score, Debt help.

Not all debt is considered bad debt. There is such a thing as good debt, which can benefit your financial position.

For example, good debt can help to improve your credit score, making it easier to apply for credit and to be approved for loans at better interest rates. In the long run, this will have positive effects on your life. 

Bad debt, however, will financially drain you, lower your credit score and make it harder for you to better your financial position or apply for loans, such as a mortgage. 

If you are struggling with bad debt, then you may want to consider applying for an IVA (Individual Voluntary Arrangement). An IVA is a legally binding agreement that can be arranged by an Insolvency Practitioner to help you affordably repay your creditors.

In the meantime, to help you understand the differences between good and bad debt, we’ve created a list of the types of debt that fall under each, along with ways to help you go about ensuring you obtain good debt.

What is Good Debt?

Businessman pushing credit score dial towards a good score

Good debt should allow you to improve your credit score. This will help to demonstrate to lenders that you can effectively manage your finances, which will open further credit options for you.

To obtain good debt, careful planning needs to be involved. For example, you need to have a budgeting plan in place to ensure you can afford repayments in the long term. 

Examples of good debt include:

  • Taking out a loan to open a business or grow an existing business. With a business plan and budgeting plan in place, borrowing money to help build a business can provide financial stability in the future if the business succeeds. 
  • For educational purposes, such as a student loan to attend university. Repayments will only need to be made once you’re earning a certain amount of money.
  • Applying for a low-interest credit builder card and sticking to the monthly repayments. Late or missed payments will affect your credit score negatively. 
  • Taking out a mortgage to enable you to buy a home. A mortgage is a type of secured loan since it is protected by an asset (in this case it is the house) that can be used as collateral should you not fail to make the repayments.

At a later date, you may decide to remortgage your home to allow you to get a better interest rate. This can be made possible if you have acquired a better credit score since applying for your first mortgage. 

What is Bad Debt?

Drawing of man chained to a debt wrecking ball

Bad debt usually occurs when you apply for unnecessary credit, such as a personal loan, and you haven’t planned how you’ll repay the lender. 

Debt can also accumulate, turning into bad debt if you don’t have the resources to make regular repayments.

Examples of bad debt include:

  • Applying for a car loan. An item that isn’t considered a necessity, such as a new car, quickly depreciates in value and usually has a high-interest rate.
  • An instalment payment plan, such as a phone payment plan. If managed well and monthly payments are made, then an instalment plan can improve your credit score. However, if you’ve opted for a phone that costs beyond your means, then this may affect your ability to stick to the payment plan and it will negatively impact your credit score. 
  • High-interest credit card. For example, credit cards that have a 20% APR or over will make your debts a lot more expensive and harder to repay. 
  • Payday loan. This debt can come with extremely high-interest rates. This type of loan is designed for short-term use, so if you aren’t able to repay the amount when you’re next paid, then the debt will accumulate quickly.

We hope this blog has provided you with a clearer understanding of the differences between good and bad debt.

If you are struggling with debt and would like to find out if you qualify for an IVA, then get in touch with Swift Debt Help, and we’d be happy to assist.  

Request a Debt Assessment

Disclaimer: For guidance only. Financial information entered must be accurate and would require verification. Other factors will influence your most suitable debt solution.

Help with credit score

5 Common Causes of a Decreased Credit Score

Written by Alex Swindells on . Posted in Credit Score, Debt help.

Your credit score plays a big role in your life when it comes to making financial decisions. This is because there are fewer credit options available to you if your credit score is low. It can also be more difficult to acquire a mortgage, or to even rent a property, with a low credit score. 

So, if your credit score decreases, then it’s very important to understand why, and how you can go about increasing it. 

But what exactly is a credit score? And how is this figure calculated?

A credit score, also known as credit rating, is a number generally between 300 and 850, although there are some credit scoring models that go higher.  The number is calculated based on information provided by credit reference agencies. This information is called a credit report.

A credit report contains details on a person’s credit history, such as the number of accounts they have open, their total number of debts, and their repayment history.

Credit reference agencies collect this information from utility companies, mobile phone companies, and mortgage lenders, just to name a few. The higher the credit score is for a person, the better it looks to lenders, and the more likely that person will be accepted for credit.

For example, if a person would like to apply for a credit card, the lender will check their credit score to ascertain whether they are eligible. Generally, the lower the credit score, the higher the interest will be. 

To help you, we have put together a list of 5 possible causes as to why your credit score might have decreased. 

We advise monitoring your credit report regularly, so that you can keep track of your credit score and notice if/when it decreases. If it does, then it could be due to any of the 5 reasons below.

1. Making large purchases on your credit card

person making large purchase using a credit card

If you use too much of your available credit limit, then this could signal to lenders and/or credit reference agencies that you aren’t in a financially stable position. However, using too little or no credit could also affect your credit score. 

You should try to find the right balance between spending too much and not enough to help you limit the negative impact on your credit score. It is recommended that you use around 30% of your credit, and that you make regular repayments.

If you do decide to make a large purchase on your credit card, ensure that you are able to repay the full amount as soon as possible, so that you don’t incur too much interest.

2. Missing credit card payments

man looking at credit score

When checked by agencies, your payment history plays a major role for the credit scoring models they use in determining your credit score. 

A 30-day missed payment can have a negative impact on your credit score. If you have a high credit score, then the amount the figure drops will be greater than it would be if your credit score was low.

Additionally, if you have gone into arrears on one of your accounts because you have missed multiple payments, then this can drastically affect your credit score for a number of years.

However, the decrease in your credit score because of missing one payment can easily be fixed. If you are late with a payment but you manage to keep on top of your payments thereafter, it shouldn’t be long before you see an increase in your credit score.

3. Paying off loans

Although it is a good idea to pay off some debt in full, this can have a negative impact on your credit report by causing your credit score to decrease.

This is because credit scoring models prefer you to have a mix of credit types to prove that you can adhere to the agreements made. The more credit you have available, and as long as you’re managing it sensibly, the higher your credit score will be, which will help to show lenders that you are trustworthy. 

4. Applying for new credit

If you apply for new credit, such as for a new credit card, then lenders will carry out a hard check. A hard check is when a lender pulls your credit report because they want to ascertain whether you have a good credit history. This hard check can lower your credit score by a few points. 

If you’ve recently applied for new credit, then consider waiting at least three months before applying elsewhere.  

When applying for new credit, you can limit the impact it may have on your credit score by requesting lenders to carry out a soft check. 

A soft check does not affect your credit score and other lenders cannot see when one has been carried out. A soft check is not always possible, but it can be worth enquiring about it before applying for new credit. 

5. Closing an old bank account

It is not uncommon for people to find they have old, often unused accounts that still appear on their credit report. Whilst you may think that closing these may be helpful, it could actually harm your score as the presence of older accounts can be a positive thing as they can increase the average maturity of your credit profile.

However, it is important to check that any historic accounts do not have any forgotten outstanding balances, even if they are small amounts, as these could be negatively impacting your credit score without you realising.

If you’re struggling to improve your credit score, then you may want to consider alternative financial solutions, such as a Debt Management Plan (DMP) or an Individual Voluntary Arrangement (IVA). 

To find out more about these debt solutions, please contact us, and we’d be happy to help.

Request a Debt Assessment

Disclaimer: For guidance only. Financial information entered must be accurate and would require verification. Other factors will influence your most suitable debt solution.