You have been told you have bad credit, but what does that
mean?
Most people think it's, 'I won't be able to get a mortgage,
car loan, credit card or bank account for the foreseeable
future'. But bad credit doesn't have to mean the end to
your financial future; there are many companies and lenders
that will take on people who have had credit problems and
without taking all your income in payment.
If you have been made bankrupt, had property repossessed
or defaulted on a loan there will be someone who is
prepared to consider you for credit.
What you have to understand is the mainstream lenders will
not be offering you credit at the normal rate, you will
have to use specialist lenders who are used to assessing
bad credit and offering a suitable product to fit your
circumstances.
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Having said that many people atomically think they have a
worst credit history than is actually the case and that it
is not worth talking to the mainstream lenders. In the past
this was probably the case but in the last 5 years many
'ordinary' lenders are prepared to take on borrows who have
had only minor credit problems so it's worth asking!
WARNING - If you are searching around for new credit after
having bad credit, do not let the lenders do multiple
credit searches. If you have lots of new credit searches
done your credit report will show these and it can affect
your credit score making the situation worst.
What you need to ask for is a quotation based on your
credit history and not a search.
For more details of 'footprints' left by credit search see
my other article;
'How to understand you credit report or Credit repair - a
step by step guide'.
If your bad credit history is not too serious many brokers
and lenders operate a cascading system to find the product
to fit your credit history without going straight to a high
charging product from the start.
The way the cascading system works is the lender will try
and get your bad credit history to fit there main product
and then move down through their adverse credit products
until their product fits your credit circumstances. This is
especially good for mortgage products as it saves having to
pay more for your mortgage than necessary.
Who ever you get to provide you with a bad credit loan you
will almost certainly have to pay a higher rate than you
would with a standard credit history. This is to be
expected as lenders always assess people for the level of
risk of the loan not being repaid. This is what they use
your credit report for and what gives you the 'bad credit'
history.
For more details see; 'Credit Report - Your most valuable
financial asset'
Lenders also base their rates on whether the bad credit
loan will be 'secured or unsecured'. If the loan is secured
they will require you have an asset that they have a charge
over which they can use to sell and repay the loan if you
default. Typically the asset would be property but it
doesn't always have to be.
Unsecured means you have no asset that can be used to
offset the loan if you default and so tend to have higher
interest rates reflected by the higher risk to the lender.
Sometimes you can have a guarantor for the loan which
reduces the lenders risk and so means lower interest rates
charged.
A guarantor is someone who agrees to cover your loan and
would become liable if you were to default on the loan
agreement. Family members can often be used as guarantors.
When agreeing to new credit don't just take the first
offer you're given as lenders are more flexible on bad
credit than they ever use to be.
You need to be checking what interest rate you are being
charged and for how long the rate will apply. Also be
careful of any conditions applied to the credit loan i.e.
what happens if you want to pay extra off the loan or get
out. Check the charge for setting up the loan as this is
often added to the loan so tends to get glossed over but
you still have to end up paying it back.
One reason for checking the get out clause for the loan
is because as you repay your new loan and hopefully
everything goes well and you maintain the payments as
agreed, you are rebuilding your credit history. After a
couple of years you may well be able to apply for a new
loan using your improved credit score to a lender that
would not charge such a high rate of interest. You would
then be able to pay off the old loan which is charging a
high rate of interest and move it to the new lender at a
new lower rate. This will then reduce your monthly
outgoings on payments. This may not be financially viable
if your existing loan has high redemption penalties if you
pay it off early, so check first.
You have bad credit but why? There are a number of reasons
and I have already highlighted the main reasons, bankruptcy,
repossession, defaults etc but to a lot of people bad
credit come as a surprise. The first they know about a
credit problem is when they try and get new credit and are
refused.
A number of small things can add up to you having a bad
credit history;
Your debt to loan ratio - this may be high due to you
borrowing at or near the credit limit agreed for the
account. Lenders look at this and may feel you are
overstretched.
A credit problem has wrongly been entered on your credit
report -you need to check your credit report for accuracy.
Your employment history - if you are new in a job on
temporary contract or self employed lenders may feel that
you may loose your income and not be able to repay the
loan.
How recent loans have been handled tends to be more
important than older problems. If you have had no credit
problems in the past but suddenly there have been missed
payments this can have a major effect on your credit
score.
Not being registered at your current address - if you
have recently moved or move around a lot and the lender
cannot trace you to a known address they will be reluctant
to lend. Make sure you get registered to your current
address.
As separate things these may not be a problem but added
together they can lead to a bad credit situation. Lenders
usually use a credit scoring system which gives each area
of your financial situation a score and then make a
decision based on the total score.
The first stop with any bad credit problem is to get your
credit report and check what is recorded in it. Quite often
people find things are recorded on their credit file that
they knew nothing about and that is what is causing the
problem. By getting this sorted out they no longer have a
bad credit problem.
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