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Borrowing money if you’ve a bad credit history

Finding the right loan can be tricky enough at the best of times but if you have a poor credit history, or none at all, it can seem like you have a mountain to climb.  

What happens when you apply for credit?

When you apply for credit, whether it’s in the form of a loan, credit card or other credit product, the lender takes three things into account:

  • First, your application itself. That will usually detail items about your job, income and regular outgoings.
  • Next, they’ll check if they’ve had any dealings with you in the past and check how well you managed repayments.
  • Finally, they’ll approach at least one of the three UK credit reference agencies to check your credit file.

These companies, Experian Equifax and Callcredit keep credit files on every borrower in the country. These files hold data which is gathered from electoral roll information, address details, credit history, account data and court records.

Your credit file contains details of any credit application you have made from either your current addresses or anywhere you’ve lived previously. It details any issues you’ve had with debt such as County Court Judgements (CCJ) Individual Voluntary Arrangements (IVA) or bankruptcy. They have access to information about how you’ve managed your bank accounts, credit cards and any other forms of credit you may have had, such as store cards.

The three agencies produce scores in different ways but irrespective of the methodology, the score is based on your borrowing and repayment history. It’s an important tool that the lender uses to decide not only whether to lend, but how much and at what rate of interest.

Why borrowing money with a bad credit rating can be hard

When a lender lends you money, they want to be as sure as they can, that they’re going to be repaid. Your credit rating is an independent assessment of how likely you will be to repay.

If your rating isn’t good, the lender may decide that you represent too much of a risk and therefore decline to lend you the money.

credit card

What options are there for people with a bad credit score?

Your options really depend on how urgently you need to borrow. If time is on your side, you can take some actions that will, over time, repair or build a better credit rating. This in turn will open up more of the mainstream lending market to you. For example, check with the three UK credit history companies and make sure their records are up to date and correct (for more information on improving your credit rating ).

However, if you need the loan more immediately than that, there are loans specifically designed for people with poor credit history.

Called bad credit loans, they might provide a financial lifeline if you are in need of funds either for an essential purchase or perhaps to consolidate other debts into one cheaper option.

Provided you’re able to meet the repayments, every time, on time, taking out a bad credit loan could actually help you repair your credit history. Proving that you can pay back the loan on time each month will improve lender confidence and should make it easier to obtain credit next time.

The downside of this type of loan is that the interest rates attached to them are very high compared to conventional loans. This is because the lenders demand a greater fee to compensate for the extra risk that they consider they’re taking by lending to you.

Make sure you also pay attention to whether the loan is called secured or unsecured. Secured means that the loan is secured against another asset, usually your home. While secured loans are cheaper than unsecured ones, they obviously carry the risk that if you fail to repay the loan you could be forced to sell your house to repay the debt.

Improving your credit score

There are a number of things you can do to improve your credit rating , some which will help in small ways immediately, such as ensuring you’re on the electoral register. Other longer term options include taking out and repaying debt as we have outlined here

How do I compare loans?

When you’re ready to see the latest loan rates and offers, use our loan comparison service. But remember, if you apply for a loan and go through a credit check this will typically appear on your credit history. So to be on the safe side make sure you check your credit rating before applying .

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