A CCJ is a county court judgement issued when a lender sues you saying that you owe money and do not respond. The judgement means the formal declaration by the court that you owe money and tells you the way to clear the dues. It depends on the verdict of the court whether you will pay it off in full or in instalments.
Once a CCJ is issued against your name, you are to pay off the debt as soon as possible. If you clear the debt in full within 30 days, it will be considered a satisfied CCJ, and you can avoid it showing up on your credit report. Otherwise, it will stay for up to 6 years even if you have cleared the dues.
Do not ignore the judgement because you can be taken back to the court again. If you think the timeframe is very short and you cannot pay off the debt, you should request to change the terms. A CCJ can badly affect your credit score.
How does a CCJ affect your borrowing capacity?
When you take out a loan, a lender checks your credit history. Although they use their own assessment formula rather than use the score calculated by credit reference agencies, they check credit history to gauge the risk of default.
Since you have a CCJ on your report, a lender will doubt your credibility regardless of the status of the CCJ. You will be considered a borrower with a very high default risk. As a result, you will be refused a loan straightaway.
A couple of lenders are out there who may consider your application, but it is important to consider associated risks as well.
- Interest rates will be high
A lender will loan you money just based on your income. You have got blemished credit history, so too much risk is involved in loaning you. To minimise the risk, the lender will charge higher interest rates. The loans for people with CCJs carry very high-interest rates, so it is vital to assess your repaying capacity carefully.
Make sure you will be able to repay the debt on time. It depends on the sum of money you borrow and whether you will pay it off in full or in instalments.
- You will be restricted for borrowing money
A lender will put a restriction on the borrowing amount. The default risk is very high, so they will not be willing to loan you a larger sum. These loans are generally aimed at funding emergencies. You will hardly get money up to £1,000.
Mostly these loans are paid off in full on the due date. However, a couple of lenders may accept payments in weekly instalments.
- They do not improve your credit score
If you are thinking of taking out a CCJ loan, hoping that it will help improve your credit score, you are mistaken. A loan can improve your credit score only when you show you managed to pay down the debt over a period of months. Even if you clear the debt on time, it does not show your behaviour towards payments in the event of a change in your financial situation.
Another thing is that no timely payments of new debt can remove the old accounts of missed payments, defaults and CCJs. They will continue to show up for a respective period. You are more likely to get money at the best interest rates when previous bad records become too old, and you do not make a new default.
The impact of a CCJ on a mortgage and a car loan
You will need a decent credit score at the time of taking out a mortgage and a car loan. To be frank, getting approval for such big loans with a CCJ is impossible. Some lenders may consider your application but will ask for higher interest rates. It is suggested that you apply for these loans when CCJ drops off your credit file, and in the interim, try improving your credit score.
If you cannot wait to have your CCJ dropped off, you should meet the following criteria:
- Have a bigger deposit
A lender will ask you to arrange a bigger deposit. The standard deposit is up to 10% for a mortgage and a car loan. Since your credit rating is not so impressive, you will be asked to arrange a higher deposit. Depending on the lender’s policy, this could be between 20% and 40%.
The higher deposit will reduce the loan-to-value ratio. When it is low, a lender will likely accept your application. However, it does not mean that you will receive funds at the most competitive interest rates.
- How recent is the CCJ
A lender will particularly pay attention to how older the CCJ is. The chances of getting these secured loans are bleak if it is recently satisfied. The lender will refuse you if that is the case. However, if the CCJ is older, your chances of being accepted are slightly higher.
Make sure you do not make a default in the meantime. Make payments of your bills, monthly rent and credit card balances on time. All these things will help a lender to understand that you managed your finances well after the CCJ. Make sure you do not have multiple judgements. Otherwise, it will be complicated to get the nod.
The bottom line
A CCJ can affect your borrowing capacity very badly. You will not be able to get the nod for various types of loan products and credit cards. It will be tougher for you to get approval for a mortgage and a car loan.
If a lender wants to assign a loan to you, they will lend only a small amount of money. You should try improving your credit score and avoid larger debts unless the CCJ is dropped off your credit file.
Take financial advice from an expert. They will make some useful suggestions after perusing your current financial situation and your goals.
