What exactly is bad credit?

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Although bad credit is a topic talked about almost constantly nowadays, there is still some confusion as to what the term actually means.

How Does Bad Credit Happen?
Put simply, bad credit scores are imposed upon an individual when they have failed to keep up with agreed payments on financial products. As such, a person may end up having their details passed on to a recognised debt collector or their name may become associated with unpaid amounts of borrowed money or unpaid bills for various services. The result of this is that potential lenders will understandably be less inclined to trust such an individual with further borrowing in case it puts them at monetary risk.

However, rest assured that one missed credit card payment or a late payment of a water bill will not automatically mean that a bad credit score will be attached to your name. For obtaining credit to become a real problem, there most likely has to be a continuous pattern of missed repayments rather than a few anomalies.

What Else Impacts on a Bad Credit Score?
There are some less well-known reasons that can incur bad credit scores too. Even something as seemingly straightforward as failing to register on the electoral roll can see you declined for a range of credit opportunities, so make sure you are on the list. Another pitfall to avoid is being in possession of available credit and choosing not to use it – it sounds odd, as surely not using credit is indicative of someone financially responsible, but to prospective lenders it can look suspicious even if it is entirely innocent.

Similarly, not having had any credit at all in the past can count against you when it comes to securing borrowing. Creditors want an idea of how trustworthy a borrower you will be, and so with nothing to prove it, they may choose to turn down your application. That is why some experts suggest considering certain types of card or bad credit loans in order to build up a more positive score from scratch, which should result in a more useful credit file for the future.

What Are the Effects of Bad Credit?
The clue is in the name, and it should go without saying that bad credit is indeed a bad thing and, as such, something to avoid if at all possible. Naturally, the biggest issue facing you if you find yourself ear-marked as having a bad credit score is the inability to borrow from the majority of lenders. On a day-to-day basis, this may not seem such a problem, but there is real comfort in knowing that if it was really needed, you would have the option of securing a loan when required.

And even if you do get accepted for a loan or a credit card, you can sometimes find yourself subject to higher interest rates, as cautious lenders are keen to protect their money. With this in mind, it is worth noting that a poor credit rating can impact on more than just your ability to take on borrowing – it can also play havoc with your insurance applications, mobile phone contracts and even potential tenancy agreements.

How Can Bad Credit Be Fixed?
If you are concerned about the perils of bad credit, you must remember that it does not have to last forever. Accessing your credit file is a good place to start, and from there you can begin to rebuild your score. Bear in mind too that not all lenders judge borrowers on a credit score alone, so considering all options is a must. Fixing your credit will take time, but it can be done.

 

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1 Comment

  1. July 13, 2015 / 13:10

    From what I can gather the best way to get a better credit rating is to somehow get credit and pay it back on time. I was suffering the issue of having very little credit history, so I just couldn’t get credit. Eventually I heard about guarantor loans whereby someone with a good credit history (provided they trust you to repay the loan) to guarantee repayment if you default.
    I found a couple of companies that appear to have their own credit scoring system and managed to get my father in law to agree to guarantee my loan. It’s still painful having to go through the process, and the guilt with admitting I needed help but thankfully I’m getting there.
    The rates were higher than the banks, but the banks had already said no so it was either that or letting my life collapse.
    Not saying it’s for everyone but it certainly helped me.
    Phil

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