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I Have Bad Credit – What Can I Do?

More and more households across the UK are using credit to help them get through the cost of living crisis.

Credit cards, loans, store cards and car finance can be useful tools if managed properly. But the combination of stagnant wages, falling household incomes, increasing costs, and higher interest rates can make these accounts more difficult to handle.

It can be easy to make a mistake that has an impact on your credit file.

In this blog, we’ll look at what bad credit is, the impact it can have, and what you can do about it.

1. What is bad credit?

Bad credit – which is sometimes called adverse credit – is a term used to describe a credit history or credit profile that is viewed negatively by lenders.

Lenders can include mortgage and loan providers, car finance companies, mail order firms, and credit card providers – anyone who might provide you with credit or lend you money.

Each lender and credit provider is different, and each one has their own criteria, but you could be seen as having bad credit if you have any of these items on your credit file:

  • Missed or late payments.
  • Defaults.
  • County Court Judgements (CCJs).
  • Bankruptcy or insolvency.
  • An active debt management plan (DMP) or Individual Voluntary Arrangement (IVA).
  • Numerous hard credit searches.

And as strange as it might seem, you could be classed as having bad credit if you have no credit at all.

This often applies to people who don’t have a bank account, haven’t had credit cards or loans, and as a result haven’t built up a credit profile. This is sometimes called having a “thin” file.

2. How does a lender view different types of bad credit?

Lenders use your credit profile to decide whether or not to give you credit. They will look back at your credit history over the past 6 years, to assess how much of a risk you might be, and how likely you are to pay back what you owe.

Having items like missed or late payments can indicate that you are having difficulty in making your monthly payments. A potential lender won’t lend you any more money or provide you with a credit facility if it looks like you are struggling to pay back what you already owe.

A lender can register a default when you have missed between 3 and 6 payments. When other lenders see a default on your file, it’s basically telling them that you have broken (defaulted on) the credit agreement you had with the lender by not making your contractual payments.

Having a CCJ on your file shows that a creditor has deemed it necessary to take court action against you to recover a debt. This is a red flag to many lenders.

A history of bankruptcy or insolvency, or current DMPs or IVAs can indicate that you have had significant money problems in the past or are currently having problems with debt.

Having too many hard credit searches on your file can suggest that you are desperate for credit. Hard searches are registered every time you make an application for credit.

Having a “thin” file can be a problem, simply because the lender has no credit history to check and therefore no past behaviour for them to assess.

This can be a frustrating Catch-22 if you are applying for credit for the first time – how are you supposed to get credit, if lenders won’t give you credit, because you haven’t got any credit?

Although they are not technically bad credit, having payday loans on your credit file is a red flag to most high street mortgage lenders.

This is because many high street mortgage lenders see taking out a payday loan as a sign that you ran out of money before your wages were due to be paid. Most high street mortgage lenders will not give you a mortgage if you’ve had a payday loan in the past 12 months.

3. How will bad credit affect me?

Having bad credit is likely to affect you in one of two ways:

  • Your application for credit will be denied.
  • Your application for credit will be accepted – but, because the lender views you as a higher risk, you will not be eligible for the best deals, and will pay higher rates of interest.

4. What can I do to improve my credit file?

Once something is on your credit file, it will stay there for 6 years. There’s nothing you can do to change it, unless the entry was registered in error, or the result of identity theft or fraud. In these cases you can contact the credit reference agencies and ask to have it changed or removed.

You can also contact the credit reference agencies and ask them to add a Notice of Correction. This is a short statement explaining something that you believe to be wrong or misleading.

You can also use a Notice of Correction to explain why you missed payments or defaulted, for example. This can be especially important if there were extenuating circumstances, like a bereavement, divorce or loss of employment.

Lenders will take a Notice of Correction into consideration when checking your file, although there is no guarantee that it will change their decision.

If you have missed payments or arrears you should bring your accounts up to date as soon as possible. If you have defaults or CCJs, you should consider paying them off. One option, is a CCJ loan.

Although they will remain on your credit file for 6 years, it might look better to lenders if you have dealt with the debt responsibly.

If you have problem debt and are struggling to make your payments each month, you should look at the options available to you to pay them off. Debt consolidation can be an effective way of getting rid of your debt and reducing your outgoings, making it easier for you to manage your monthly commitments.

Once you have dealt with any bad credit that has already made its mark on your credit file, there are several things you can do going forward to improve and maintain your credit score:

  • Get on the electoral roll.
  • Set up direct debits to make sure your minimum payments are automatically made each month, which will mean you will avoid missed or late payments.
  • If possible, pay off your credit card balance in full every month.
  • Keep your credit card balance to less than 50% of your credit limit.
  • Avoid high cost short term lending (payday loans).
  • Be careful when shopping around and applying for credit – making too many applications will result in too many hard checks.
  • Check your credit report regularly, and if you see something that is incorrect, or an item of credit that you do not recognise, report it to the credit reference agencies.

5. What can I do if I have a “thin” file?

Start off by getting on the electoral roll and opening a current account. Having a monthly mobile phone contract and paying for your car insurance monthly will also help. Over time, your credit file will start to build up as you manage the monthly payments.

6. What about credit builder cards?

Credit builder cards are designed to help people build up their credit file, or repair it if they have bad credit. These cards usually have a comparatively low credit limit and a relatively high interest rate compared to regular credit cards – this is because of the potential risk to the lender.

The important thing to remember when using credit builder cards is to make your payments in full and on time, and if possible, pay off the balance in full every month. Set up a direct debit to make sure your minimum payment is covered and keep your balance well below 50%.

Over time, as you show that you can manage credit responsibly, your credit score will start to improve.

7. What if I have bad credit and want a mortgage or secured loan?

Just because you have bad credit doesn’t mean that you won’t be able to get a mortgage or a secured loan.

But you should understand that because of the perceived risk you pose to the lender, you won’t qualify for the best available deals and the interest rate is likely to be higher.

If you have bad credit and you’re looking for a mortgage or secured loan then it’s important to get the right financial advice. Your best bet is a whole of market broker, who has access to specialist lenders who offer mortgages and loans that are specifically designed for customers with bad credit.

We work with a variety of banks, building societies and specialist lenders, so we’ll always be able to find you a solution that works for you, whatever your credit profile.