Bad credit. Many of us can have financial woes that lead to a bad credit score. But what does it mean? And how does it affect us? And, most importantly, how do we repair it? This guide will give you everything you need to know.
In simple terms, if you have missed several arrangements to make payments on debts or credit that you owe, it will have an adverse effect on your credit score.
This can affect the decisions made by lenders and some services to give you more credit in the future. They may not let you borrow anything at all, or they may charge you higher interest rates than someone ‘less risky’ with a better credit score.
Your credit score is produced by a number of different companies, known as Credit Reference Agencies (CRAs). In the United Kingdom, the biggest three credit agencies are Equifax, Experian, and Callcredit.
These organisations build a report of your financial history, based on payments made to credit cards, banks, and utility bills. They also report on your legal status, so if you have been arrested, sued, or been declared bankrupt, that information will be on your report.
When you ask a lender to borrow money or need to use a service such as insurance, utilities, or renting a house, they will assess your credit score. This will be between 300-850, and the higher your score, the less of a risk you will appear to be to the lender/service. A score of 700 or more is deemed to be ‘good’.
What is deemed as a ‘good’ score varies from lender to lender. There is no standardised cut-off point, although any score that falls below 600-620 is likely to be deemed as a risk.
Bad credit can have a dramatic impact on your life. It can limit your ability to borrow money, get a mortgage and rent a place to live. It can also affect many other things that might surprise you, including taking out a simple contract on a mobile phone.
You can still borrow money and take out loans if you look hard enough. But these will tend to come at a high price – far higher interest rates or insurance payments, for example. It may also lead to landlords and energy companies charging you higher deposits for security.
While many people are aware of their debts and missed payments, it can come as a surprise to some who genuinely don’t know they have a poor score. If you have never had trouble getting a loan before, for example, and then are inexplicably refused, then it is likely there is a problem with your credit.
There are many other situations that can give you a clue. Perhaps you are getting random calls from debt collectors, or you are turned down for a job you applied for. Maybe you can’t find a landlord that will rent to you.
If any of these situations happens to you – or anything else you think might be out of the ordinary – then it is vital to check your credit score as soon as possible.
If it turns out you do have a bad credit score down to your actions, you must seek out ways of addressing your finances. Often, using a debt management plan can be a good idea. It helps you to move forward and starts you on a road to more sensible borrowing.
There are a few different ways of getting a debt management plan. Firstly, you can approach your creditors and sort them out yourself. This DIY method is probably your best bet when you are just starting to repair the negative effects of bad credit. It’s cheaper for you, and you may be able to come to an agreement with your creditors that they freeze your interest charges and give you a set amount of time to pay back what you owe.
However, if your debts have already spiralled out of control, it might be a good idea to approach a third party to arrange things on your behalf. Charitable organisations such as Step Change will contact your creditors for you. They will arrange affordable terms so that you can manage your repayments better. Bear in mind that when you go on one of these types of debt management plans will be recorded on your credit report. But, if it is already crumbling, then it is a good way to attack all of your debts at once, and also enables you to have a target date of paying everything back.
Once you are aware that you have a poor credit report, don’t worry. As long as you take the right steps to fix it, you can claw back your rating and get on a level footing again. It can take hard work, time, and a lot of determination, but it can be done.
Getting a credit card, store card, or even a loan as soon as possible will help; even though it might seem counter-intuitive. Remember that good credit is given to those that borrow sensibly, so as long as you are meeting your regular payments, you will be building your score back up again.
However, because you have a tarnished credit rating, you could be charged quite extortionate interest on what you borrow. Be aware of that fact when you are looking for loans online – the advertised interest rate may not be what you are finally offered. With this in mind, it is vital to make sure you pay back what you owe every month, on time, and never miss a payment.
The most vital part of rebuilding your score is to be aware of what you are spending. Use only a couple of credit cards wisely and you will improve things every month. It’s a long-term process and involves changing your mindset entirely.
We hope you have enjoyed this article. Although bad credit can damage your financial life, it is possible to sort things out for the future. It might take some time, but it is possible.