What options are available for people with bad credit?

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By having a bad credit score, it can limit your ability to access mainstream finance and loan products including credit cards, personal loans and mortgages.

If you have a record of defaults, missed payments and arrears, this will reflect on your credit file and you could lose out on finance needed for an important purchase.

However, there are always options available to assist those with bad credit, especially since some are unprecedented. If you have an emergency, health issues, family loss or suddenly lose your job, it is common to fall behind on payments for everyday bills. With this in mind, we highlight some key options below: 

Adding a guarantor

The popularity of guarantor lending has emerged in the last decade. Whilst typically used for businesses and guaranteeing losses on big deals, it has become more mainstream to assist consumers. Essentially, borrowers add another person (the guarantor) to their loan agreement and this person agrees to cover their cost if they cannot make it.

The idea is that the guarantor has a strong credit profile and has disposable income to make the payment if need. People will commonly add their parents, siblings or close friends, with their permission – and from their standpoint, they are able to help out their friend or relative without actually putting out the money.

Based on lenders such as Amigo, Buddy and UK Credit, the loan amount available is £500 to £15,000, with the average loan borrowed around £5,000 repaid over 3 to 4 years. Not only can the bad credit customer get access to the funds they need, but getting into the cycle of making regular repayments can improve your credit score.

Every successful payment is recorded by the credit reference agencies Experian, Equifax and Call Credit and over time, your score will improve which will help you get access to more flexible and affordable finance. However, if you fall behind on payments, this will also worsen your credit score and leave you worse position than you started.

Credit builder credit cards

The idea of credit builder credit cards is that they allow you to borrow a small amount, such as a few hundred pounds, at a higher interest rate than normal. As a credit card, you can use it for everyday purchases including groceries, bills and more and then you are required to pay if off in full at the end of the month.

In the same way as a guarantor loan, making regular repayments on time will improve your credit rating over time, hence it is a credit builder. However, if you fall behind on payments, you risk the same fate that your credit score can get worse. This type of credit is not only used for those with bad credit but also young people with no credit, helping them start their journey to financial freedom. 

Apply through a broker

Using a loans broker, you potentially have access to numerous companies and offers in one place. Whether you use an official broker or comparison site such as My Financial Broker, or Omacl.co.uk for bad credit loans you are usually introduced to companies who want to help and only get a commission upon your successful approval.

The things to be careful of are making sure that you do not pay too much for your loan, only proceeding with a company that is FCA authorised and avoiding any upfront fees. One key point is being aware of soft and hard credit searches – with the latter having an impact on your credit score if you make too many applications in a short space of time. So if you apply with a broker, you want to avoid being ‘hard searched’ by numerous companies or this could have a negative impact on your endeavours.

Improving your credit score

Of course, by improving your credit score, you get access to the best rates possible for personal loans, mortgages and even zero percent credit cards.

Whilst having a history of missed defaults and payments is not ideal, your credit score is only temporary and be improved at any point.

Some of the simplest things to do is starting by getting your credit report for just £2 so you can keep an eye on it and continue to monitor it. Otherwise, joining the electoral roll, consolidating your debts, closing any credit cards and store cards that you don’t need is the best way to start. Then, you need to get into the cycle of making regular repayments on time and not making defaults, and then you will be on your way to the best credit status possible.