Free Credit Report guides

Bad credit history and rating? Here’s what to do

Some may think: I don’t need credit, so why does it matter if I have a bad credit history and rating? The truth is, even if you don’t need credit right now, life can take an unexpected twist at any time. And in such a situation, it’s good to know you have credit available should you need it.

What causes a bad credit history and rating?

Some things that damage your credit rating are more well known than others, such as missed or late payments. While instances like these cause heavy hits to your credit rating, a one-off shouldn’t mean damage beyond repair. Just set up direct debits to prevent this happening repeatedly.

On the other hand, below are five of the biggest credit no-nos that can often kill your credit rating for years.

  1. County Court Judgments (CCJs)

A County Court Judgment is where you’re taken to court due to an outstanding debt you’re not paying off. A payment plan will be set up, so the lender can get their money back.

If a judgment is made against you, it won’t appear on your credit report if you pay the total balance within one month. However, if you can’t do this, the CCJ will be part of your credit history for six years — even if you’ve long since paid off the debt — and can make it very difficult for you to get credit.

  1. Debt Management Plans (DMPs)

If you’re struggling to keep up with your repayments, you can sometimes come up with a special arrangement with your lender to pay off your debt in a more manageable way. This is often called a Debt Management Plan.

You can do this directly with your lender, or pay a licensed company to do it on your behalf.

However, be careful. While a DMP is still preferable to not paying your debts at all, some lenders could still view your having to use one as a sign of poor money management.

  1. Individual Voluntary Arrangement (IVAs)

An IVA is often seen as a better alternative to bankruptcy. It’s a legally binding arrangement between you and your lenders, where you agree to pay all or some of your debts. It stops your lender from taking further action against you.

You must use a licensed insolvency practitioner to get an IVA (insolvency is a fancy word for not being able to pay off your debts). You must make regular payments to the practitioner, who then shares this among your lenders.

If you think an IVA can help you with your debts, you should first seek advice from a legal expert, such as a solicitor.

Keep in mind that an IVA will stay on your credit report for at least six years, and can make getting credit very difficult.

  1. Bankruptcy

Bankruptcy should really be a last resort. If you’re struggling to make payments, it’s best to contact your lender and see if you can arrange a payment plan that suits you better.

If you are declared bankrupt, it will stay on your credit file for at least six years, even if you pay off the debt before then.

Some lenders will point-blank refuse to give you credit if you’ve been made bankrupt, as they can see this as a sign of poor money management.

What’s more, some landlords and employers carry out credit checks on you. Bankruptcy can affect your chances of getting the home or job you want.

  1. Someone else…

Do you share credit with someone else? Such as a joint bank account with an overdraft, or a joint mortgage?

If so, it might be their bad credit history that’s affecting yours. It’s a good idea to check your Free Credit Report to see if you’re financially linked to anyone.

A bad credit rating isn’t always the result of a bad credit history

Some people have a bad credit history and rating because they haven’t managed their credit very well in the past. Lenders therefore see them as more of a risk, and the only solution is to follow the advice below.

However, some people might find they have a bad credit rating due to a lack of credit history.

For example, if you’re new to credit or haven’t used credit much before, there won’t be much of a record of how responsible you are when it comes to borrowing money.

In either case, there are many credit-building products out there, such as credit cards designed for those with limited credit history.

When used responsibly, they’re a great way to help give your credit rating a boost and flesh out your credit file. You can compare the credit cards you are eligible for at TotallyMoney

How to improve a bad credit history and rating

Consider credit-building products

You must use credit to get credit. There’s no way around it. However, getting credit might be hard if you have a bad credit history and rating.

If you are struggling to get accepted, you could consider a credit card, for example, designed specifically for those with a bad credit history and rating.

These cards tend to have an extremely high APR, so it’s best not to carry a balance on them. If used responsibly, though, they can help fix a bad credit history and rating.

Keep up to date with payments

It’s best to set up direct debits for at least the minimum monthly payment. Then your credit history and rating won’t take a dent.

Looking at your Free Credit Report is also a great way to see an overview of your accounts, and check if anything needs your attention.

Get on the electoral register

Being on the electoral register proves where you live, and helps lenders verify that any credit applications you make are genuine.

Check your credit report details are accurate

Any errors could be genuine mistakes, but could also be a sign of fraudulent activity. In either case, lenders might be suspicious of your application and be more likely to decline.

If someone has the same or similar name, it’s also possible for their credit file to mix with yours. And it they have a bad credit history and rating, it could affect yours.

Check your credit report regularly to make sure your information is correct.

Sever financial ties

If you’ve taken out joint credit with someone — such as a joint bank account with an overdraft, or a mortgage — their credit history and rating can affect yours.

So, if the other person has a bad credit history and rating, you should keep your credit arrangements separate.

It’s important to break these ties if you’re no longer financially associated with them, too. Get in touch with the three credit reference agencies — Callcredit, Experian, and Equifax — and ask to be financially disassociated.

Looking at your Free Credit Report is a great way to see if you have financial ties with someone else.

Limit credit applications

While making a lot of credit applications won’t necessarily affect your credit rating, it can affect your ability to get credit. Lenders can think you’re desperate for money if you’ve made a lot of credit applications and have been rejected, and might be less likely to lend to you.

 

Avoid Payday Loans

While it can be tempting to choose a payday loan when you need credit urgently, you should avoid them if possible.

Payday loans are often seen as a sign of managing your money poorly. As a result, many mortgage lenders reject mortgage applications if you’ve ever had one.

Use savings to clear debt

The interest you make on your savings will often be much less than the interest you pay on your debt. So, before you borrow any more, see if you can use savings first.

Bad credit history and rating: a summary

  • The big no-nos are late and missed payments, CCJs, DMPs, IVAs, bankruptcy, and payday loans
  • Some have a bad credit history and rating because they’ve managed credit poorly; others because their credit history is limited
  • Credit-building products, getting on the electoral register, and keeping up with payments can help improve a bad credit history and credit rating.