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How debt default can impact an individual's credit score

Credit scores are an important part of most people's financial health. So, as a creditor, it's important to be aware of how you can leverage that fact to chase an overdue debt.

Here's the scenario: you've supplied goods or services to an individual on credit terms. Despite a string of reminder letters and phone calls, you're struggling to get paid the money you're owed. Therefore, you enlist the help of a professional debt collection agency, who then contact the debtor directly to chase payment.

Is that enough to have an effect on the customer's credit rating and persuade them that it's time to settle the debt? Unfortunately, the answer is 'no'. However, the debt collection agency will be able to advise you on the next steps you can take which could affect the debtor's ability to unlock savings and benefits, including access to loans and credit cards on the most favourable terms.

What is a credit score?

A credit score is like an individual’s financial CV. It's a number based on your financial behaviour and it helps lenders decide whether you're a good credit risk. Your credit score can range from 0 to 999. Typically, the higher your score, the more likely you are to qualify for loans on the best terms, including lower interest rates, higher loan amounts and lower fees.

How a CCJ affects a person's credit rating

Let's say you've taken court action against a defaulting individual debtor and obtained a County Court Judgment (CCJ) against them. Unless they settle the full amount of the outstanding debt within one month of the CCJ being issued, it will appear on the debtor's credit report and will almost certainly reduce their credit score significantly. They could find themselves getting turned down for many financial products, such as loans, mortgages, credit cards and even certain types of bank accounts.

The CCJ will stay on the debtor's credit report for six years, even if they pay off the debt in full before that. So, it's a very serious issue for their finances, which is why the threat of a CCJ can be a highly persuasive way of encouraging a debtor to pay up.

Taking things to the next level

Unfortunately, the risk of getting a CCJ, or even the threat of issuing of one, doesn't always have the desired effect. If you're still struggling to recover a debt, your debt collection agency can support you in taking things further.

If the amount you're owed is over £5,000 and you're sure the debtor doesn't have the cash available to settle the debt, your debt collection agency may advise starting bankruptcy proceedings against the debtor. This is a big step, so having the expert guidance and support of professionals will help you move forward confidently and by the letter of the law.

The effects of bankruptcy

So, what are the implications for a debtor if they're made bankrupt? First and foremost, they risk losing personal possessions, property and other assets, which can be seized and sold to settle their debts.

However, bankruptcy doesn't just have an impact on their personal life. In addition to the credit issues and the social stigma, it means they can't be a director of a limited company, so it could affect their future earning potential and business interests. It can also have serious implications for those working in certain professions. For example, under the Solicitors Act 1974, a legal practitioner who is made bankrupt will automatically have his or her practising certificate or registration suspended.

Placing your debt collection in safe hands

The good news is that most debtors will choose to pay up before they allow any of the above to happen. However, whenever you're struggling to recover an outstanding debt, it's reassuring to know that Redwood Collections can help. With our expert support, you can reduce the risk of having to write off a debt, ensuring that your finances don't take a hit and that your business continues to Grow Stronger.

Email us at info@redwoodcollections.com

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