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Does an agreement in principle affect credit score?

Written byKoyo Loans
Last Updated26th October 2022
Contents
  • In 30 seconds…
  • Introduction
  • Does an agreement in principle affect credit score? 
  • Does balance transfer affect credit score? 
  • Does council tax affect credit score? 
  • Does closing a bank account affect credit score? 
  • Do loans affect your credit score? 
  • Does a one day late payment affect credit score UK? 
  • Does applying for overdraft affect credit score UK? 
  • Conclusion 

In 30 seconds…

There are lots of elements to your credit score, and it can be affected by multiple factors. In spite of what you might currently believe, the likes of agreements in principle and council tax payments don’t appear on your credit report. However, late repayments, loan applications, overdrafts, and closing your bank account can all impact your credit score. The key thing to remember is that anything related to borrowing money will influence your creditworthiness and will be reflected in the score that you’re given by the UK’s credit bureaus.

Introduction

There are lots of things that can affect your credit score, from personal loan applications to balance transfers. So, in this article, we introduce certain aspects of your personal finances that are likely to affect your credit score, and what you can do to ensure that they don’t cause you issues when you attempt to borrow money in the near future.

 

Does an agreement in principle affect credit score? 

An agreement in principle is obligation-free and only necessitates a soft inquiry on your credit file. As such, it doesn’t have a negative impact on your credit score, as it’s hard checks performed by lenders that appear on your credit file. 

Applying for an agreement in principle is an effective way of discovering if you can borrow the money you need to buy or remortgage a property without performing a full credit check. You need to provide the lender with details of how much you want to borrow, what your current earnings are, and what your regular spending looks like. 

While it doesn’t affect your credit score, you should also be mindful that an agreement in principle isn’t a guarantee that you will get the money that you require. You will then need to go through the mortgage or loan application process, during which the bank or lender will perform a hard inquiry on your credit file. 

Does balance transfer affect credit score? 

A balance transfer can be an effective way of moving debt, and it won’t hurt your credit score directly. However, the act of applying for a new card is likely to impact your credit score. 

Applying for a new credit card to facilitate your balance transfer will result in a hard inquiry on your credit report. This will knock a few points off your credit score in the short term, but it could be a smart move in the long term. If you’re better able to manage your repayments on the new card that you take out, it will help your credit score in the long run. 

The key to improving your credit score with a balance transfer is using it to reduce your debt. When you meet your repayments and lower your debt to income ratio, your credit score will improve as a result. So, while a balance transfer might result in a short-term dip in your credit score when managed properly, it can be beneficial in the long run. 

Does council tax affect credit score? 

In the UK, local councils don’t report any data to credit reference agencies, so you don’t need to worry about council tax arrears affecting your credit score. That being said, failing to pay your council tax will lead to fines and eventual court action, so it’s important to keep up with your payments. 

In other words, there’s no way of lenders knowing whether you’re in arrears with your council tax, just by looking at your credit file. Still, this is no excuse not to pay your council tax. Missing or avoiding council tax payments will lead to other problems.

If you’re struggling to pay your council tax, you can apply for Council Tax Reduction. Also known as Council Tax Support, you will get a discount on your council tax bill if you’re eligible. Eligibility for the scheme is based on your income and whether or not you’re on benefits. Every council runs its own scheme, so you will need to enter your postcode to begin your application online.

Does closing a bank account affect credit score? 

Closing a bank account that you no longer use won’t directly affect your credit score. However, if you’ve closed a bank account with a negative balance, it could impact your score and your ability to access credit in the future. 

Banks don’t report your bank account information to credit reference agencies, so it isn’t listed on your credit report. Therefore, details of bank account closures won’t show up on your credit file. This means there is no direct link between closing a bank account and your current credit score. 

If you’re planning to close a bank account, you need to make sure you do so when you don’t have a negative balance on the account. Even if you clear the account, you should consider any pending transactions that could bring the balance into the red after you’ve closed it. This is a really important step, as closing a negative bank account will harm your credit score in the future. 

Do loans affect your credit score? 

Taking out a loan will affect your credit score, regardless of the type of credit that you apply for. Personal loans, guarantor loans, payday loans, and mortgages all affect your credit score, albeit in slightly different ways. 

When you apply for a loan in the first instance, most lenders will submit a hard inquiry to a credit agency to review your credit file. This will cause your score to take a short-term hit. Your credit score will then be affected as your debt to income ratio increases. Therefore, in the short term, taking out a loan can cause your credit score to drop.

However, provided that you meet the repayments of your loan on time and don’t miss any payments throughout the duration of your loan, it will show you to be a responsible borrower and actually help you to build your credit score. So, don’t worry too much about the short term hit that your credit score will take following a personal loan application. Provided you’re on time and consistent with your repayments, it will actually help your credit score in the long run. 

Does a one day late payment affect credit score UK? 

Although being one day late with a bill or credit payment isn’t a good thing, it won’t show up on your credit file if you rectify the issue right away. However, if you don’t make the payment when you notice your mistake and leave it for an entire bill cycle (thirty days), it will appear on your credit report. 

This is because late payments are noted on your credit report once you have skipped an entire billing cycle, which is typically a period of thirty days. So, if you meant to pay a bill yesterday but didn’t, you can contact your lender today and make the payment. They will not report your late payment to the credit agencies. 

However, this doesn’t mean that your late payment will be entirely penalty-free. Many lenders and utility companies charge you a penalty fee for a late payment, which you will have to pay on top of your standard repayment. The key thing to remember if you’re a day or two late with payment is to resolve the issue right away and make the payment as soon as you can. If you do this within thirty days, the late payment shouldn’t show up on your credit file.

Does applying for overdraft affect credit score UK? 

As an overdraft is a form of credit that you can add to your current account, applying for one will affect your credit score. When you approach your bank to open an overdraft, they will likely perform a hard inquiry on your credit file, which will see your score temporarily dip as a result. 

When your overdraft application is approved, you can then use it throughout the month as and when you need it. Provided you pay it off at the end of the month and don’t enter what is known as an unauthorised overdraft, it shouldn’t negatively affect your credit score. In fact, if you use your overdraft sensibly, it can help you build up your creditworthiness and will help you in the long run. 

On the other hand, unauthorised overdrafts can negatively affect your credit score as it can be interpreted as your inability to manage your finances. Therefore, it’s much better to contact your bank to request an arranged overdraft in advance, even if your credit score does take a short term hit from the hard enquiry. 

Conclusion 

There are lots of things that affect your credit score in the UK, so it’s important to discern between one situation and another. Being sensible with your finances and understanding how your credit score will be affected is really important, as you don’t want to negatively impact your chances of borrowing money when you need it in the future. 

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Key Takeaways

Discerning what does and doesn’t influence your credit score is crucial if you want to work on your creditworthiness. One of the biggest influences on your credit score is late payments, but you typically have thirty days to put it right due to the reporting cycles of lenders. If you don’t put it right, it can take up to a year for your credit score to recover, and the missed payment will show on your file for seven years. 

Applying for loans, overdrafts, and other forms of credit will cause your credit score to dip temporarily, but provided that you’re on time with your repayments, your credit score won’t be negatively affected in the long run. As for bank transfers and closing an account, your score will only be impacted if you have open credit accounts or make a new credit application. Also, if you fail to clear a balance before closing your account, this will have a negative impact on your creditworthiness. 

Ultimately, ascertaining the different factors that appear on your credit file will help you as you take steps to work on your credit score. Remember, anything related to borrowing money is likely to affect your credit score in some way.

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