In and Out – How People Recover From a Bad Credit Rating

Being turned down for that mortgage you need to buy your dream home, not being able to finance a new car or simply not being approved for a 0% credit card can be frustrating and embarrassing. Millions of people are in this position – it is thought that as many as one in four of all consumers have been turned down for credit in the last few years.

But hundreds of thousands of people who previously have had bad credit records and been unable to access mainstream sources of lending have managed to rebuild their credit records through a combination of patience, financial probity and smart thinking.

If you find yourself in the position of having a bad credit rating, the situation is by no means irredeemable. If you take the right course of action it is possible to be borrowing again in a few months and have a triple A credit rating in just a few short years.

The three main credit reference agencies – Equifax, Experian and CallCredit – hold information on every borrower in the UK. That information details all of the loans and other forms of borrowing (credit cards, overdrafts, mortgages etc.) that you have taken out in the last six years. That includes loans that have been satisfied within the last six years. Before any lender is likely to offer you a loan or credit card, it will check your credit record with one or more of the agencies. If it finds that you have missed repayments, defaulted on a debt or had a county court judgement (CCJ) registered against you, then it is highly likely that you will be turned down. 

Some lenders take an even stricter approach with late repayments, evidence of other financial difficulties and a non-existent track record of borrowing all more likely to lead to an application being rejected.

But you don’t have to wait for six years from when you experienced financial difficulties to be able to start borrowing or taking out a new credit card. There are number of simple steps that you can take to start rebuilding your rating immediately: 

1. Commit to making repayments on time, every time

The black marks on your credit rating tend to fade with age so long as you don’t start adding new ones to the list. That means that if your recent financial behavior is more responsible, the importance of your previous mistakes will lessen. Lenders are more interested in recent history rather than something that happened to you years ago. The fastest way to rebuild your credit rating is to commit to be a responsible borrower and begin to ensure that all of your repayments are made on time. These will then start to outweigh whatever mistake you made in the past.

2. Try to pay something off

If you’ve got some spare cash, it might be a good idea to pick one of your loans or credit cards and pay the outstanding balance. When lenders consider you for new credit, as well as looking at your past financial history, they will also look at how much credit you have available to you and how much you have actually used up. If you have several maxed out credit cards, loans and a mortgage, it is less likely that you’ll be able to afford the repayments on another loan and so less likely that you’ll be approved. 

If you pay something off (particularly a credit card) then you will reduce the amount that you owe compared to the amount of credit that you have available to you.

3. Take out a ‘credit builder’ credit card

Several of the major lenders including Barclays, HBOS and CapitalOne, now offer versions of their mainstream credit cards designed for those with poor credit records. You will often hear these referred to as ‘credit repair’ or ‘credit builder’ cards. They come with lower credit limits and higher interest rates than other cards but are a useful way for somebody to take out a small amount of borrowing and demonstrate that they can be relied upon to keep up with the repayments.

4. Get hold of your credit records

The credit reference agencies will charge a small sum (usually £2 or £3) to supply you with your credit record. It is certainly worth doing this if you suspect you have a poor credit record because it will allow you to check whether there are any mistakes on it and identify the areas where you need to improve if you want to start borrowing again in the future. 

Your record will usually include your credit score – which encapsulates your credit worthiness at any particular moment with a lower score showing you to be a higher credit risk and less likely to be offered credit. The higher your score, the lower your credit risk and so you will be more likely of being approved for a loan or other form of credit.

5. Consider guarantor loans

If you are really struggling to take out a loan because you either don’t have a sufficient credit record or your history is poor, you might want to consider a guarantor loan. With one of these, a family member or friend stands as a guarantor enabling you to take out a loan even when you have been turned down elsewhere. That means that the guarantor will have to make the repayments should you fail to do so but if you keep up with these, the improvement will be shown on your credit record.