Types of credit that could affect your credit score
At Lowell, we realise that there are lots of different credit products available on the market and you might not realise that some of these are forms of credit.
To help our customers understand more about credit and debt, we’ve created this guide to look at some of the most common credit products and the ways they can impact your credit score and financial health.
In this guide:
- What are the different types of credit?
- What is a credit account?
- Can having different types of credit affect your credit score?
- Understanding different types of credit
- What counts as a utility bill, and do they appear on your credit score?
- How Lowell can work with you to clear your debt
We understand that there are lots of different types of credit products available to you. Sometimes they may go by different names which can make things even more confusing.
Below are the types of credit we will go through in this guide:
- Credit cards
- Store cards and catalogues
- Car finance
- Mobile phone bills
- Payday loans
- Personal loans
- Guarantor loans
In the UK, most types of consumer credit are governed by the Consumer Credit Act 1974. This means that when you borrow money, you’re usually protected under this legislation.
However, there are some credit types which do not fall under this legislation and are exempt. For more information on this, head to StepChange's guide to the Consumer Credit Act.
You might have seen the term ‘credit account’ used in financial guides. A credit account is an account that you have with a supplier or store where you can borrow and repay money to make purchases or buy goods. It can be a loan, an overdraft, or a credit card. Sometimes you may also see it being referred to as a ‘line of credit’; but they have the same meaning.
It's important to know that having any form of credit can affect your credit score. You can find out more about how having credit products affects your credit report from the three main credit reference agencies in the UK – Experian, Equifax, and TransUnion.
To find out more about your own credit score, you can check out our guide to how your credit score affects you. You can also download the Lowell app, which gives Lowell customers access to their TransUnion credit score for free.
If you have seen your credit score impacted, then there may be a few things you can do to improve it. You can check out our article on how to improve your credit score for some tips on ways to do this.
There are lots of different types of credit – here are some of the major ones you might have heard of. Depending on what type of credit you have, once you use a form of credit this information could potentially be used by other creditors when deciding whether to provide you with additional credit or not.
Credit cards are probably the form of credit that you’ll have heard the most about.
Your credit card will have a pre-agreed ‘credit limit’ which you can use to pay for goods or services. Every month you’ll receive a statement for what you’ve spent which will tell you how much you need to pay back.
If you have a credit card, then your provider will keep credit reference agencies updated with your account details and will include details such as how much you owe and how much you have paid each month.
Information shared by your credit card provider can include the balance owed, your payment history, and if the account has defaulted. Credit card companies can also give extra information such as your credit limit, how much you’ve spent per month, and how much you withdraw from cash machines per month.
When we talk about store or catalogue credit, this can include a few different types:
- Store cards – This is when you get a card that you can use at a particular shop. You can use the card to make purchases from the store that you will pay back at a predetermined date.
- Buy now pay later - In short, buy now pay later (BNPL) allows you to make purchases and either pay at a later date (e.g. in 30 days) or in a few instalments. This tends to be promoted when online shopping or if you’re buying from a catalogue. For more information, you can check out our article on 'buy now pay later'.
- Catalogue credit – This is when you can shop using catalogues with credit accounts who let you make payments over a period of time. This can include pay weekly or pay monthly catalogues.
Car finance refers to when you borrow money in order to be able to pay for your car. There are various ways you can do this including:
- Hire purchase (HP)
- Using a personal loan
- Lease or hire agreements
- Personal contract purchase (PCP)
- Logbook loans
For more information on the different car finance methods, you can check out this StepChange article.
Whilst it might not seem obvious, a pay monthly mobile phone contract is a form of credit. This is because you have an agreement to make regular payments over a certain amount of time.
Plus, sometimes when you try applying for a mobile phone contract the company will do a credit check to help determine how trustworthy you are. This means that they are assessing the risk of providing credit to you, and you being able to pay it back.
If you stop paying your mobile phone bill, then your account may go into arrears. Some providers may even cut your phone off so you can’t use it to make or receive calls. If it gets to the point where your account defaults, then this may be noted on your credit file and may impact your credit score.
An overdraft is a type of credit where you borrow money through your current account. Essentially, you spend more money than what you have available in your account which means you become ‘overdrawn’. You can apply for an overdraft through your bank, but it’s worth noting that going into your overdraft can involve interest and charges depending on the terms of your account.
There are two different types of overdrafts, authorised and unauthorised. An authorised overdraft is when you arrange it in advance. An unauthorised overdraft, sometimes called ‘unplanned’ or ‘unarranged’, is when you don’t already have an agreement in place with your bank but still spend more than you have available in your account.
Like other forms of debt, an overdraft can appear on your credit file and will show the amount you owe.
Typically, credit products, including arranged overdrafts, are unlikely to have a significant impact on your credit score as long as you stick to your agreement and make regular payments. You may even see your score improve if you regularly pay it off. This is because you already made the agreement before needing to use it.
On the other hand, an unarranged overdraft could negatively impact your credit score. This is because you haven’t got a pre-arranged agreement in place with your bank.
Payday loans are a type of high-cost short-term loan. Payday loans usually have high interest rates which means that you will need to pay back a lot more than what you took for the loan.
As long as you’re in a position to pay it all back on time then your score shouldn’t see any change due to a payday loan. Some companies do view payday loans negatively so having one appear on your credit file could make it difficult to work with them. You can find out more about payday loans and their impact on your credit file from Experian.
Personal loans are when you borrow a certain amount of money from a bank or creditor. You will have a payment plan in place to pay a fixed amount for a set period of time.
Like a lot of other similar forms of credit, personal loans can affect your credit score. This tends to be because if you miss payments or pay late, you could see your credit score go down.
Guarantor loans work like other loans where you borrow money from the lender and make regular repayments. The main difference is that as part of your agreement there is another person who guarantees the loan, aka the guarantor. The guarantor is responsible for making sure that the debt is paid off.
If you can’t afford to repay your guarantor loan, then the account might default. The creditor will then ask the guarantor to resolve the outstanding balance. A default will be marked on both the borrower and guarantor’s credit files. And if this continues to go unpaid, your credit score can be affected.
Utility bills include electricity and gas and are classed as ‘priority bills’. This is because if these are in arrears, it’s important that these are prioritised over other types of unsecured debt such as credit cards because you could be at risk of your supply being cut off.
If you have more than one debt and aren’t sure which you should pay first, you can check out this helpful Citizens Advice article on how to work out which debts to deal with first.
Some utility bills might not appear on your credit file. This is because utility companies don’t always report your monthly payments to credit reference agencies like Experian, TransUnion, and Equifax.
However, if you’re missing or making late payments, then you may see your utility bills negatively affect your credit score.
If you’ve just started working with us to help clear your Lowell debts, you might be wondering what we’ll do, and how we’ll help. Once Lowell has purchased your debt, we’ll be in touch to let you know about the next steps.
After hearing back from you, we can come up with the best solution for you. We do this by using our budget calculator tool to see what is affordable for you based on your personal circumstances. You can easily control and access your account to make online payments via our online portal.
If you’re a customer of Lowell and worried about a Lowell debt impacting your credit score, let us know. And if you’re struggling to make payments or have any other concerns or questions, please get in touch with our team so that we can work out a solution together.
Alternatively, if you prefer to speak to someone else then there are lots of other independent organisations available who can help by offering free and unbiased financial advice including Citizens Advice and StepChange.
At Lowell, we’ve partnered with Transunion, the credit reference agency, meaning you can easily access your credit score for free via our mobile app. For more guides covering a wide range of debt-related topics and information on working with Lowell, you can head over on the Lowell blog or our debt guidance hub.
First published: 29th December, 2022
If you're a Lowell customer and you have concerns or queries about your debt with us, then please do get in touch. Our friendly and supportive team will be more than happy to help.