Bad Credit: How Why Where & What?
Bad credit, poor credit, adverse credit – these are all terms for the same thing. If you are finding it hard to get a loan or another form of credit (even a new mobile phone contract) then you’ve probably got information on your credit file that is scaring lenders away.
You’ll probably have lots of questions about how you came to get a bad credit rating, what you can do about it and where you can get credit from in the meantime. We reckon there a 7 key questions you’ll want answers to, so we’ve listed those below:
Why do I have Bad Credit?
Any company that extends you credit or lends you money reports your repayment behaviour to at least one of the UK’s three main credit reference agencies – Equifax, CallCredit and Experian. They will retain this information for six years. Any other company you wish to borrow from can access this information to decide whether they wish to give you credit.
There is obviously a spectrum of information that is held about your credit behaviour – from a single missed payment on a loan 4 years ago for example all the way through to that bankruptcy that happened 2 years ago, etc. So, not all information has the same weight. Even a lack of any credit history (perhaps because you’ve just become an adult, or moved to the UK) can weigh against you. While you might term this “bad credit” it clearly isn’t the same thing.
There is also a chance that if you have become unwittingly the victim of identity fraud that there is information on your credit file that is false and that could count against you. There is also the chance that there is information held about you that is correct but that should already have been removed.
Bad Credit: What Can I do?
Struggling to get credit? Don’t give up. In general you should:
- Only apply to lenders who cater for poor credit:
- continuing to apply to mainstream/high street lenders could actually worsen your credit rating!
- consider specialist credit rebuilder credit cards
- Check your credit file to help fix your credit score problem
How Long Does Bad Credit Last?
Generally the cutoff period is 6 years – e.g. credit agreements stay on 6 years after they were settled; CCJs stay on 6 years after the day of judgement. Searches by lenders to whom you have applied for credit remain on your file for 12 months. Other information (e.g. linked addresses, whether you’re on the electoral role, etc) remain on your file indefinitely.
So, if today you were to classify yourself as having bad credit and had no outstanding credit agreements, it would take up to 6 years for your file to naturally “clean” itself. But there are actions you can take to speed things up.
How Do I Get Rid of a Bad Credit History?
- checking your file to ensure the information on their is all correct
- not applying for credit you know you’ll be rejected for – searches are stored for 12 months
- taking advantage of credit products that are designed to help improve your credit rating
- ensuring that if you do have live credit agreements that you make sure repayments are on time and in full – new good news will help to dilute bad news already held in your credit files.
My Credit is Bad What Can I Do?
If you need a loan but keep being refused then there are a number of things you can do that will help you in the short term to medium term:
- There are credit products specifically designed for bad credit situations:
- Stop applying for credit from high street lenders – you will keep being rejected and their searches of your credit file will actually make make your credit rating worse
- Follow our guide to help rebuild your credit status – this should be done in parallel with any new credit, but does take time to implement. Start today!
Managing with Bad Credit Problems
Where Can I Get a Loan if I have Bad Credit?
- guarantor loans
- bad credit personal loans
- instalment loans
- debt consolidation loans
- credit cards to help rebuild credit
As with all credit and regardless of credit status lenders are obliged to ensure that loan repayments are going to be affordable. So affordability checks will be undertaken.
What Are The Best Loans If I Have Bad Credit?
First, before you borrow more do ask yourself if it is really necessary. If you are already in debt and have struggled to meet your payments you need to consider whether it would make more sense to look at cutting your expenses first and trying to repay some of what you already owe – we have lots of tips for doing this.
If you consider you are in control of your budget but want to reduce the cost of your existing debt then you could consider consolidating your debt.
If you need to borrow extra there there are some specific bad credit loan options to look at.
How Will Bad Credit Affect My Spouse?
Being married does not automatically link the two of you financially so if one of you has a credit problem it does not mean the other is affected by it. However, if you take out credit jointly then your credit files will become linked.
If you have a bad credit rating and your spouse’s is excellent then they may still be unaffected. However, if their rating is OK rather than excellent then your rating could turn a credit acceptance for them into a credit rejection. And of course this works the other way around too.
It’s important that married couples maintain separate bank accounts and credit cards so that they can sustain separate credit files and credit histories even if they occasionally take out credit agreements together.
Our Money & Credit Guides
If you’re uncertain which type of credit might suit you or you have a money problem then one of our guides may help you. We summarise each type of loan and their pros and cons and address issues regarding debt and credit ratings.
Additional Questions & Answers
Everything stems from your credit file. You don’t have one until you turn 18 and can start to borrow – things like credit cards, loans, mortgages, etc. So, everyone starts by having no finance history at all.
Having no credit history can itself be a problem as lenders can’t judge how reliable a borrower you will be, but while this is a problem it is not a majoe problem. In this case a credit card company might offer you a card but with a low limit to begin with.
Over time you accumulate a borrowing/repayment history in your file. Lenders will record your borrowing behaviour with one or more of the UK’s three main reference agencies (Experian, Equifax and Callcredit). The files will show whether you pay on time, whether you get into arrears or miss payments, and whether you default on debts completely. You might also get court judgements against you (so-called CCJs). So, there are degrees of “bad creditworthiness”. Some people’s files contain more adverse events or adverse events of a more severe nature.
When you apply for any form of borrowing the lender will use the data in your file to judge the risk of providing you with it – in other words they will score you. If your score is not high enough they will refuse your application.
Be aware, as well, that the act of applying for credit will be recorded in your file (unless the lender does a “soft search”). If you make applications too frequently this fact will have a further adverse impact on your rating.
You have certain rights if a company decides it won’t lend to you:
- Lenders are obliged to tell you the main reasons for the refusal
- If you were computer credit scored you can ask the lender to manually review the decision
- If you were manually scored and you have additional information that you believe may help your case you can ask the lender to review their decision
- The lender must tell you which credit reference agency they used to get the information about you – you can then check the information held by them to ensure it is accurate.
If the decision is reviewed by a lender then may still turn your application down. Since not all lenders use the same credit reference agencies and because they may/will use different scoring techniques while one lender may refuse your application another may accept it. But be cautious about applying too frequently as this act itself may affect your score!
Guarantor loans are one type of unsecured loan that could help you get finance when your borrowing history is less than perfect. Guarantor loans require you to provide someone to back you in your application and to stand behind your debt and repayments should you fail to do so.
They work on the principle that if you can find someone who trusts you to pay off the debt then your credit score (i.e. the measure of risk of lending to you based on your historic behaviour) is much less relevant.
In addition to getting you the borrowing you need they offer you the chance to improve/rebuild your credit rating. Each time you make a monthly repayment on time and in full this good news is added to your file so helping to dilute the bad news that is already on there.
As you can see from the comparison of borrowing options above there is no single type of product – just a number of alternatives that may suit people who have issues in their borrowing file. So, whether a loan is “safe” or not depends on the type of product in question.
So, what would be the worst case consequences of not keeping up your repayments:
- Guarantor Loan (unsecured) – your guarantor would be asked to step in and make the repayment; this would undoubtedly sour your relationship with your guarantor. Your file would be marked with the missed payments. A lender could ultimately go to Court to get an order agaionst you.
- Personal Loan (unsecured) – missed payments would be recorded on your file. If the lender were to issue a default notice this would also be recorded. The lender could go to Court to get a judgement (CCJs) and ultimately an order could be given to recover property to help repay the debt.
- Secured Loan (e.g. homeowner and logbook) – when you borrow this way you place an asset (e.g. your house or car) as security. Ultimately the asset could be seized by the lender to pay off the debt.
- Cash Loan (e.g. payday and doorstep) – these short term loans are “political dynamite” so lenders are very cautious about handling missed payments or delays in payment. There are very strict rules about how a lender can enforce the borrowing terms. Failure to repay will damage your credit rating.
In the case of any type of finance you should never borrow more than you can afford to repay. Lenders are required to conduct affordability tests prior to lending any money. But as a borrower you are obliged to repay on the terms agreed. If you fail to there are always going to be some consequences. At the very least your borrowing rating will be downgraded making borrowing harder in the future.
Your borrowing history and your file is an aggregation of all your interactions with finance companies and other businesses who let you borrow (e.g. utility companies and phone companies). If you have experienced money problems and this has led to you missing loan repayments or being late paying some bills then your file will be tarnished for a while.
If you were to need to borrow more in this situation then it may be more difficult to. So, a lender who is more tolerant or a financing product that is more tolerant of a poor borrowing history is likely to be a solution. All the loans on this page are tolerant of a less than perfect history. The loans may be more expensive than you are used to but this will be the case while you are seen as a higher risk. However, if you pay off any new borrowing on time and in full your credit history will be improved and rates you pay in the future are likely to be lower.
The key advantage is that just when you think you can’t get finance you can – all the finance products above are built with borrowing issues in mind. You don’t need perfect credit to get what you need.
Without these sorts of loan available people who have an adverse histories would never be able to borrow again and they would never be able to prove that they could manage their finances. The reality is that credit issues can hit anyone at any time due to a change of circumstances (e.g. moving house, changing job, becoming unemployed, etc).
The phrase “bad credit” is bandied about a lot. But at the heart of this phrase is the reality that someone has had a problem managing the borrowing they have previously been allowed. It could be a few missed payments or something more serious like a default notice or a CCJ. For a new lender deciding whether to lend they will see people with bad credit histories as more risky.
A lender could choose not to lend or they could choose to do so at an interest rate that is higher than normal to help offset the higher risk. It is this higher interest charge or APR that is perhaps the major disadvantage. But in addition a borrower could be requested to offer a guarantor or an asset as security.
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