Could a £7.60 debt stop you buying a house?

Credit card debt

A new study has revealed that 1.2 million people aged between 18 and 34 have missed a bill payment. It's hardly surprising: these are busy and messy years, where paperwork and admin aren't always at the forefront of people's minds.

They may have forgotten to pay the last bill of a mobile phone contract, or accidentally left a utility bill debt when they moved house. The problem is, however, that years down the line, they could find this small oversight costs them dearly when they try to borrow money.

Some 70% of young people have no idea that forgetting a bill like this could come back to bite them. The most common reason people gave for missing a payment was that they already thought the final payment had been paid (27%) but almost a quarter thought it didn't matter (23.4%).

The research, by ClearScore, also found that 31% of young people have been rejected for either a mortgage, store card, personal loan, mobile phone contract or car finance - in many cases because a missed payment has shown up on their account.
The study found that the average unpaid bill is just £7.60, so people are hardly skipping the country to dodge enormous debts. However, it's enough to get them refused a mortgage, because any unpaid bill will damage your credit rating.

To make matters worse, if you have completely forgotten this unpaid bill, there's a good chance you won't realise why you have been rejected, and will simply apply for another form of credit. These applications will all show up on your credit file - and act as red flags to borrowers who may assume you are amassing mountains of debt - making it harder and harder for you to borrow in the future.

CEO and founder Justin Basini comments: "Missing a minor payment may seem harmless at the time, but it can come back to haunt you. The consequences of defaulting on a payment – even it's just a small amount – can be huge. A lender will take into account the information in your credit report before giving you a mortgage or a credit card. This isn't just about how much you owe or earn, but more importantly how you have managed your credit in the past."

What can you do?

Basini points out that: "Unless it's a bank or credit card firm, organisations aren't legally required to let you know you're about to default on a payment. The onus is therefore on us to keep track of what we owe to whom."

It's important to keep files for all the bills you have to pay, so you know what is due, and when, and can revisit them when closing any account, to be certain you have paid the final bill.

If you think there may be old bills that have been neglected for a while, your best bet is to check your free credit report with an organisation like ClearScore, or a paid version like Experian (which offers a 30-day free trial) or Equifax.

Your report will show you anything outstanding, and any details that may count against you when you apply for credit. Once you know your true situation, you can pay any outstanding debts, improve any problems, and stop applying for credit you are unlikely to be accepted for.

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Could a £7.60 debt stop you buying a house?

There are some very common reasons for building up problem debts. Here we reveal seven of the most common, and what you can do if you face them.

Unemployment or illness that means one or more of the household’s earners are unable to work will bring a profound change in family finances, and according to the Money Advice Service is the most common reason for getting into problem debt.

If your circumstances change, therefore, you need to immediately address your family finances, and put everything on a minimum spend lockdown. You should also look into the benefits and tax credits that are available sooner rather than later, to try to close the gap.

If you are on the kind of contract that means varying hours, it can be incredibly difficult to work out what you can afford to spend - making it the second most common reason for getting into debt - according to the Debt Support Trust.

Rather than swinging through the extremes from week to week, the best approach is to establish a budget that will work in the leanest of months, so you don't find yourself getting used to the months when you work more hours.

According to Citizens Advice, trying to service too much debt is the third most common reason for getting into difficulties. The TUC found that those with problem debts spend 40% of their income on debt repayments.

If you are in this position, you officially need some help with your debt problems. If you continue to rob Peter to pay Paul, you will end up owing more and more, so you need to take stock and talk to a debt charity about all your options.

The double-whammy of the legal bills combined with the incredible cost of establishing two separate households is enough to make divorce or separation the fourth most common reason for going into debt - according to the Debt Support Trust.

There's no easy solution, but if you are going through this, it can be helpful to talk through your financial situation with someone you trust or a debt charity, who can help you balance a stretched budget.

Problem debts aren’t necessarily caused by a sudden shock to the system. According to the Money Advice Service, 20% of their clients are simply trying to live on an unsustainably low income.

If you are in this category, it’s important to seek help on the benefits and tax credits you may be able to receive. It’s not always easy to navigate the system, but charities like StepChange have experts on the benefits system who can talk you through what’s available.

The combination of rising costs and stagnating wages over the last few years has meant increasingly people saw their monthly wage cover less and less of their monthly outgoings. This position has started to ease more recently, but has left many people far worse off than before the financial crisis. The Money Advice Trust said a combination of this and unexpected costs was responsible for almost one in ten problem debts.

If you consistently spend more than you are expecting, it's well worth keeping a spending diary. That way you can establish the real cost of living, and start to identify where you can cut costs.

The Money Advice Service says it commonly deals with individuals who have struggled to get to grips with budgeting and debts, and have got into debt because they don’t have the skills and knowledge to manage their money effectively.

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