Worried that a history of bad credit will cause you problems if you want to borrow? Are there even loans available to you?
Well, if you have marks on your credit history, we’re not going to lie – borrowing more will be difficult. And it might not be the best course of action for you to take right now. But it doesn’t mean it’s impossible.
Let’s take a closer look:
What’s the damage?
Everyone who has signed up for credit has a credit history. It’s simply a record of your borrowing agreements and activity going back over at least the last six years.
In addition to any credit you’ve taken out, your credit history lists details like whether you have motor insurance, a mobile phone contract or are on the electoral register. It also shows your current and previous addresses, and the details of anyone with whom you share finances.
As well as this information, your credit history shows how well you have managed your borrowing. If you always make your repayments on time and in full (or make at least your minimum monthly repayments on a credit card), this will be noted.
And if you have been late with or missed a payment in the last six years, this will also be recorded. Further, if you’ve ever defaulted on a credit agreement or been subject to a formal debt solution, such as an IVA or bankruptcy, this will be noted on your credit history.
All of this matters because if you apply for credit, the lender will look at your credit history. It’s one of the tools they’ll use to help them decide whether or not to lend to you.
What if my credit history is bad?
If you have an adverse credit history and wish to apply for credit, the process is unlikely to be smooth. This is not to say, though, that you’ll be turned down.
You may still be able to borrow, but at a higher rate than you saw advertised. This is because the fact that you’ve struggled managing credit in the past means you present a greater risk to the lender, and charging you more helps to minimise some of this risk.
So, you’ll probably have to pay more to borrow if you have a poor credit history, and you may have less choice with whom you borrow from too. Not every lender will lend to someone with a poor credit history.
If you are bankrupt or on an IVA, it’s unlikely that you’ll be able to borrow, even from a specialist lender. There are rules in place that mean you have to tell the lender your status if you want to borrow above a certain amount, and they’re likely to reject your application if they think you pose too great a risk.
Can I get a loan?
There are two types of loan – homeowner and personal. Homeowner loans are secured to your property, which gives lenders extra security and means you can often borrow more, for a longer term and at a lower interest rate than with personal loans.
Personal loans don’t use any of your belongings as security, so your home is never at risk. You may have to pay a higher rate of interest, and these loans typically provide a smaller sum for a shorter period than the secured alternative.
Your credit history will be taken into account by both secured and unsecured lenders. However, because your home is used as security for a homeowner loan and this reduces some of the risk the lender is taking, you may find this type of loan is more accessible to you if you have a poor credit history.
There are lenders who specialise in borrowers who have run into trouble with credit in the past. They may offer you credit at a higher-than-average interest rate in return for the additional risk they’re taking.
But, as long as you manage your side of the agreement responsibly, you should see your credit history improve. This will open you up to more competitive deals in the future.
Should I borrow?
Borrowing and sticking to your agreement can help you to improve your credit history. By making your payments on time, you’ll show that you can be trusted with credit.
As a result, slowly but surely you’ll see your credit history improve. As it does, you’ll become eligible for more competitive interest rates.
However, if you have been the subject of a formal debt solution, it might be best not to borrow at this time. A rejection for credit can further damage your credit history, and it’s important to give your finances time to recover.
You can still help repair your credit history at this time by doing things that don’t involve borrowing more. This includes paying your rent, signing up to the electoral roll and keeping on top of all the credit agreements you have.
Disclaimer: All information and links are correct at the time of publishing.