How does bad credit affect you?

Bad credit suggests to lenders that you’re less likely to pay back the money that you borrow based on your past financial behaviour. This means some may refuse you credit whilst others will lend to you but charge more interest or offer you a lower credit limit.

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Some of the possible consequences of having bad credit include:

1. Higher interest rates

Lenders calculate their decision to lend money based on risk. When the risk increases, they will usually charge higher interest rates and offer lower credit limits to counteract it. This is to offset the potential cost of recouping the money later down the line.

That means your options are likely to be much more limited to higher interest rates compared to someone with good credit.

2. Rejected applications

Bad credit can increase your chances of rejection, as lenders have different criteria that they use to approve your application, meaning that some may not be prepared to lend to you whilst you have bad credit.

If your application for credit is denied, be careful about applying again.

Multiple applications can give lenders the impression that you’re desperate for cash, which can further harm your chances of being accepted. Every application also adds a hard check to your credit report which causes your score to take a temporary dip.

It’s always a good idea to use soft search facilities or eligibility checkers before submitting any applications. These let you know the likelihood of being accepted without affecting your credit score. We use QuickCheck to see if you’re eligible before you apply for a credit card.

Using soft check facilities means you can restrict your applications to those where you have a high chance of acceptance.

What affects your credit score? 

There are a few different factors that can have a negative impact on your credit score.

These include:

  • Not being registered on the electoral roll - Registering proved your identity to lenders. You can register here, it only takes five minutes.
  • Recent credit applications - All hard searches on your credit file are logged. Find out who can see your credit report and what will be classed as a hard search.
  • Missed or late payments - Even a payment that’s a day late can be recorded on your credit report. Set up Direct Debits to make sure you pay on time, every time.
  • No credit history - Lenders like to see evidence of you borrowing and paying back money. Absence of this can decrease your score.
  • Excessive credit utilisation - This refers to the amount of your credit you're using out of the available credit limit. If you use less than 25% your score should increase.
  • Making reduced payments - If you’re struggling to keep up with payments, your lender may agree to a reduced monthly payment plan to help. This can be through communication with you or more formally, perhaps as a consequence of a debt management plan (DMP) or an Individual Voluntary Arrangement (IVA).
  • Financial associations - If you have open joint finances or joint credit accounts, such as a shared mortgage or joint bank account, the person who you share it with will have their credit history logged on your report. That means that lenders may check their credit history as well as yours when deciding whether to approve you. If your financial associations have missed payments or debts on their credit report, you may be refused as a consequence. If it’s an old tie or a friend or family member who has a lot of debt, you may want to consider breaking the link with a notice of disassociation.
  • Defaults - This is when the account is closed due to a series of missed payments, usually 3-6 months.
  • CCJs - If money that you owe isn’t paid, then the person or institution you owe money to can apply to the County Court to get the money paid off. They can only do this after your account has defaulted.
  • IVAs – If you are unable to keep up with your monthly repayments, you may enter into an IVA. This is a formal and legally binding agreement between you and your creditors to pay back debts over a period of time in manageable amounts. This is usually the last step before bankruptcy.
  • Bankruptcy - If you’re unable to settle your debts and have exhausted all other avenues, then you may consider applying for bankruptcy. As it’s the most serious of all debt consequences it has the biggest impact on your score.
  • Mistakes - Mistakes happen. If your report logs any of the above or even an incorrect address, it can impact your score. That’s why it’s a good idea to check your credit score regularly, and get in touch with the relevant credit reference agency if a mistake is spotted.

How long does bad credit last?

Negative marks stay on your credit report for up to six years. If you believe that there has been a mistake with your report, you can dispute this to try and get it removed.

Hard checks on your file (when you make a full application for credit) stay on your report for about two years, with the exception of searches done by debt collection agencies, which may stay on for longer. In this case, you can prevent further harm to your credit report by refraining from making too many applications.

What can I do to fix my bad credit?

Although there’s no quick fix for improving your credit score, there are things you can start doing now to show lenders that you’re responsible with your finances. These include:

  • Paying your bills on time, every time - Meeting all your contractual agreements every month will avoid missed payments, which can be a cause of bad credit. Set up direct debits or develop an effective reminder system so you never miss a payment again.
  • Borrowing responsibly - The best way to offset the damage of poor borrowing is to demonstrate better behaviour. So only take out credit agreements if you are confident that you can keep up with the repayments in full.
  • Improving your credit utilisation - Try to only borrow what you need and be mindful of what you’re using the money for. Always try to pay your balance off in full each month. If you can’t afford to pay it off in full, make sure to make at least the minimum repayments.
  • Checking your credit report regularly - You can check your report for free with all three of the main credit reference agencies, Equifax, Experian and Transunion. Our member-only platform, CredAbility enables you to check your Equifax report for free, for life.

If you are consistent with your repayments and only borrow what you need, you will start to see your credit improve over time. Charities such as Stepchange can also offer help and support if you’re struggling with bad credit.

If you do need to borrow, it may be helpful to opt for a credit card designed for bad credit, which can help you to build your credit back up if used responsibly.