Every month, thousands of people across the UK apply for a short-term loan. Apart from the possible short-term influence on your credit score, can short-term finance affect your retirement? And if so, what can you do about it?
A poor credit score could leave you struggling to get credit
A poor credit score may mean that lenders are less likely to let you borrow money from them.
There are lots of myths surrounding credit scores. When you apply for a loan with a Financial Conduct Authority (FCA) regulated lender, your credit score will almost always be checked. When you apply for short-term finance, what is known as a ‘footprint’ could be added to your credit file, which may be visible to other companies for up to 12 months.
If you apply for short-term finance regularly, in a short space of time, you could look as if you are desperate for money.
Furthermore, some lenders can view applications for short-term credit as an indication that you may be prone to financial difficulties, as these kinds of financial products can sometimes be used by people who may already have a poor credit rating.
You could end up paying higher interest rates
A poor credit score could result in you paying higher interest rates on any financial products you decide to take out, in order to mitigate the potential risk, the lender may consider that they are taking by lending to you.
You may find it difficult to change your mortgage
Having a higher credit score could be useful in retirement if, for example, you want to remortgage, so that you can obtain better interest rates than you are currently on. A poor credit rating may make this more difficult.
Having a poor credit rating may also have an impact upon your ability to get finance for a new car that you may want to buy during retirement.
Not being able to save
Being in debt may make it almost impossible to save money.
Taking out short-term loans on a regular basis, to pay off bills or unexpected expenses, could leave you constantly having to pay back loans, rather than putting money aside.
Putting money aside for your retirement can help to make you much more comfortable financially, when you finally do stop work.
Reducing the impact of short-term finance on your retirement
There are some things that you may be able to do to reduce the impact of taking out short-term loans on your retirement.
Firstly, try not to make applications for payday loans unless you are absolutely sure that you need them. It is not a good idea to make speculative applications.
Secondly, do not apply for too many payday loans in a short space of time. For lenders, this may signal that you are desperate for finance.
Start to improve your credit rating
Finally, if you have a poor credit score, take steps to improve your credit rating before you retire. This could be achieved by, for example, ensuring that you pay off your debts on time. It may also be possible to do this through a ‘credit rebuilt card’.
You can check your credit score online if you don’t already know it.
Multiple applications for short-term loans could leave ‘footprints’ on your credit file. If you need to apply for short-term loans during your lifetime and find that you have a poor credit score, ensure that you work to repair your credit rating in the future, to help to avoid problems with finance during your retirement.