Most of us would not have a clue what to do if we were to become insolvent, or what warning signs to look out for when applying for credit.  We all assume that we would not be able to get approved credit if we could not afford it.  But this is where everyone is dreadfully mistaken.

Some institutions will give you money if you could not afford it, and some would not even bother to calculate if you could afford it!  As long as they get their market share, the shareholders will believe that the company has growth potential and the share price will be strong. They count on the good nature of consumers to make every effort to repay their debt and issue warnings and fines when things start to go wrong.

That’s right.  Some institutions would not care if you were actually broke.  As long as you have a good credit rating they will continue to give you more credit, knowing that you will keep up your repayments to protect your credit rating. You could end up insolvent and loose all you own if you are not careful about how you use debt.

67,580 people were declared insolvent in 2005.   Individual insolvencies increased by 57% in the last quarter of 2005, compared with the last quarter of 2004.

The problems associated with accumulating more debt than your income can cope with include:

• Damaged credit rating

• Black listing

• Negative Equity

• Assets repossessed

• Bankruptcy

• Court hearings

• Criminal charges
  
  

The leading cause of these problems is not repaying the debt that is actually owed, but repaying the interest charged for it.  It pays to leave enough headroom in your budget for unexpected increases in the rate of interest charged.

Your credit rating is what lenders use to assess your ability to pay them back. Since the credit crunch started, it is more difficult to obtain credit, especially from banks. By witholding too much credit from the economy, it could grind to a halt. So lending to fund economic growth is important. With so many people out of jobs, lending can help to stimulate the economy by funding the growth of smaller businesses.

If there are problems with your credit rating, what should you do? The first step is to obtain your detailed credit report from Equifax or Experian. Google has all the details. If there are any reports of late payments or unresolved disputes recorded on the report, contact the company who issued it and negotiate with them to remove it.

Always be aware that companies can put damaging information on your report without notifying you about it. When you are refused credit, the lender will not tell you what the cause of the decision is. The only way to find out is to obtain your detailed credit report.

You can also write to Experian and Equifax, asking them to remove any information that is false. Unfortunately some companies get nasty when you switch suppliers and try to blacklist past customers with false information on their credit reports.  There is very little to stop them from doing so, therefore it pays to keep an eye on your credit report and follow up on anything you are not sure about. You can also complain to your bank or industry regulators such as Ofcom or the Ombudsman. In severe cases of harassment, it is best to contact your local police or citizens advice bureau.  In cases of fraud over £1m, the serious fraud office can offer advice. There are always advisers willing to help, but be careful if they charge fees.

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