Having a bad credit rating can seem like some kind of social stigma. But it isn’t: hundreds of thousands of people in the UK suffer poor credit records because they have made mistakes in the past and have difficulty getting accepted when they apply for credit cards, loans, mobile phone contracts and even new utility company accounts.
This may be because they have made financial mistakes in the past and have not kept up with the repayments on their borrowing. However, it may simply be because they have not registered to vote or even because they have never had a reason to borrow money in the past.
If you’re in this boat then you find yourself in good company. Many people discover every day that a simple mistake made up to six years ago has rendered them unable to get approved for credit by one of the major financial organisations or high street banks. But the good news is that there is now a burgeoning market catering for the so-called sub prime sector – people who do not have good or excellent credit scores and have been rejected by traditional lenders.
Many of these lenders will be keen to help people rejected by the banks who have continued to tighten their lending criteria despite the financial crisis being a distant memory. There is a massive choice when it comes to sub prime credit and you won’t necessarily have to pay very high interest rates or be forced to settle for a very small loan. Some sub prime lenders tailor the interest rate and the total amount available to borrow to an individual’s credit score – the higher the number, the better the terms you’ll be offered even if you have been rejected elsewhere.
Use pre-eligibility checks
Every time that you make a formal application for credit, this is recorded on your credit file by the three main credit reference agencies. This information is held on the record for two years and, if a lender judges that there are too many searches in a short space of time, it may think that you are in financial difficulty. You can avoid this by using some of the pre-eligibility checks provided by some lenders and credit comparison sites. These are so-called “soft” searches which are not recorded on your file but give you an indication – usually express as a percentage – of your chances of being accepted for a loan or credit card.
I don’t own a house – can I still borrow money?
It used to be that those without a good credit score could not borrow money without putting up some form of security – either in the form of collateral (a house or a car, for instance) or with a guarantor prepared to act as security on the borrowing. But there are now very many financial organisations prepared to consider applications for personal or unsecured loans from people with bad credit records.
While these loans will come with higher APRs that loans offered to people with perfect credit scores, they are probably more affordable that you think. This form of credit is not secured against property so if you apply for one, you won’t be risking your home should you fall behind with repayments. Interest rates and other fees can vary considerably so it’s a good idea to shop around before signing up with one particular lender.
If one lender rejects your application, don’t panic. The market in sub prime unsecured lending is growing all the time.
Credit cards for smaller amounts
While people with very poor credit records are unlikely to be offered any 0% introductory offers by credit card companies, those with fair or impaired ratings might fare better. While the major banks generally only cater for people with excellent records, other financial institutions offer 0% introductory periods for people with fair credit records (those with scores of between 400 and 600). Even if you can’t find a 0% offer, other cards have lower introductory rates and so long as you’re not looking to borrow a very large amount, credit cards can be an affordable way to borrow the money you need.
Are you a homeowner?
If you own your own home, you will find that a lot more lenders are prepared to consider your application for a loan. A secured loan gives a lender the security it is looking for when considering people with impaired credit records. It means that, in extreme circumstances, it will be able to recover the original loan sum plus interest by forcing a borrower in default to sell their house.
Secured loans also allow people with poor credit records to borrow larger sums of money – typically more than £15,000 – than if they had applied for an unsecured loan. The interest rates on secured loans are usually lower, too, meaning that an applicant may find these a more affordable way of borrowing money than other forms of lending.
Remember, though, that you are putting your home at risk. It’s especially important that the loan repayments are affordable throughout the term of the agreement. You should also be clear about the total interest that you will eventually end up paying.
What about a payday loan?
These have had a very bad press in recent years mainly because of the practice of rolling over a loan month to month and the resulting addition of interest to the original amount. But payday loans are now tightly regulated by the Financial Conduct Authority (FCA) with limits on the number of rollovers allowed and caps on interest rates. Payday loans are a reasonable choice if you have a bad credit record, only want to borrow a few hundred pounds and are confident that you will be able to repay the total amount plus interest on the date agreed.
Are there any other routes?
Credit unions are an alternative for people with bad credit ratings who have been rejected by other lenders. These organisations serve the local communities they are based in and offer both loans and savings accounts. The downside, however, is that many credit unions insist that you save a certain amount with them before being eligible for borrowing.
Article provided by Mike James, an independent content writer in the finance industry – working alongside finance-broker Solution Loans, who were consulted over the information in this post.