Bad Credit – How bad is bad?

You have been told you have bad credit, what does that mean?

Most people think that’s it, 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.

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.

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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.

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.

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For more details on ‘footprints’ left by credit search see the article;

‘How to understand you credit report  

Credit repair – Your 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.  

Reasons for having bad credit

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.

Any of the above as separate things 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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For details about how to get and understand your credit report see other articles.

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