Credit card debt contributes to a poor credit history

Monitor your credit record and identify the weaknesses

The first thing you should do is get hold of a copy of your credit report. These are available through companies such as CallCredit, Equifax, and Experian. They consist of your personal information (name, address, marital status etc), your public information (e.g. electoral roll details, court appearances), and, most importantly, your financial history - your available credit, your debt record, and so on. This information will allow you to identify what exactly has lead to your poor credit rating. In addition to this, most companies are advised to explain their decision if they have rejected you for credit so that you can see where you are going wrong, and take steps to correct this.

It is also important to read your credit record as you can check for any errors or omissions that may be having a negative impact on your rating. If you find any, talk to the company that input the incorrect data. You can also add a short notice of correction to your record explaining the error, which lenders have to take note of.

If possible, pay off all outstanding debts

This may seem overwhelmingly obvious, but it is of course highly important. If you have the means to do so, make sure all your bills and debts are paid in full. Even the smallest unpaid bill can affect your credit score and remain on the record for up to three years. Of course, this is not always possible. If you cannot afford to do so, try contacting the companies you owe money to and explaining the situation. You may be able to negotiate on repayments and find a means to pay that fits your budget – companies would rather your bills get paid over a longer period than not at all. Keep a constant eye on your bills. Using internet or telephone banking will make this easier, and will help you see if you will not be able to make a payment ahead of time, meaning you can renegotiate terms before an unpaid bill ends up marring your record.

Approach the situation logically and think things through

There are a number of small issues and changes that can be addressed to help improve your credit rating, but they require that you make decisions objectively and rationally. Firstly, if you have been rejected for credit or a loan by one company, do not immediately apply elsewhere. The chances are that the next company will reject you too as they are likely to be assessing you by very similar criteria. This can lead to an ever-worsening spiral of rejection which will not look at all good on a credit record. Instead, after the first rejection, find out why this happened, and address the problem. It may be hard to do this if you are in urgent need of money, but it will help you in the long run.

Cut up the credit cards

Secondly, don’t use credit cards for all your spending needs, especially the extravagant ones. Use it either only when needed (perhaps keep it hidden where it is out of sight so you cannot be tempted) or else use it only for small purchases that you know you can repay in full at the end of the month. The latter may be the most useful, as it demonstrates your ability to borrow and repay, which will reflect well on your credit score. On the other hand, do not think that not borrowing or not using a credit card at all will help your score. Having too much available credit puts lenders off. You need to be seen to have a record of being able to borrow and return money in order to be desirable to credit companies, so do charge smaller amounts to your card, and make sure you close down accounts that are no longer in use.

Joint accounts

Thirdly, if you are thinking of setting up a joint account with a friend or partner, make sure you are fully aware of their financial habits. Sharing a bank account with someone who has established a very good record will boost your own. Conversely, sharing with someone who has a poor record will also drag yours down. Of course, this requires you to be rather harsh on your loved ones, but if it saves you from financial difficulty in the future, it is a necessary evil. Make sure also to remove any old joint account partners from your record, because even after the account is closed, your name is still linked with theirs, and their poor credit can haunt you even after you have severed all other ties.

Seek professional financial advice

Finally, if the situation seems dire and you cannot get a handle on your finances alone, seek professional help. Accountants and credit counselling experts are available to help you manage your money more efficiently, and keep your expenditure in line.

Secured vs Unsecured loans: What’s the difference?

A Secured loan means that the lender holds a valuable asset belonging to the borrower as collateral against the payments. Therefore, if repayments are not met, the asset can be seized from the borrower and sold to cover the cost of the missed installment. This is often the borrower’s house, but could also be a car or any other valuable item.

An Unsecured loan is, as you might have guessed, a loan that is not protected by an asset. The borrower is bound by contractual obligation, and may be met with late payment charges or could even find themselves in court should they fail to meet each installment.

Which loan is right for me?

The answer to this question lies in what you need a loan for, how much you need to borrow, how long you intend the repayment period to be, and the state of your personal finances.

Certain types of loan are by their nature secured, for instance Home Equity, Homeowner, and Car loans. This means that until purchase is entirely complete, the product remains in some respect property of the lender, and can be resold to cover their losses. This is really the same as any product – when you’re shopping, the item in your basket is not truly yours until you have checked out, and, should you find that you don’t have enough to pay for it, it can rightfully be reclaimed by the retailer so that their profit is not affected. Personal loans are often unsecured because factors of amount and term length are usually lower, so there is less risk to the lender.

Borrowing amounts

The amount you wish to borrow will affect whether or not your lender will require collateral. Unsecured loans are usually available up to £25,000, so if you require a relatively small amount of money for a short-term project, an unsecured loan may be useful. Amounts over £25,000 are usually secured because of the increased level of risk to the lender on offering money at that scale. They need the guarantee that they will be covered should you fail to repay them. However, Secured loans can also be taken out at costs as low as £3000, and up to £50,000 on average. Some lenders may increase to £100,000.

Loan repayment periods

Generally speaking, Unsecured loans have much lower repayment periods. Around the £10,000 to £25,000 mark, repayment term lengths may stretch to as much as ten years, but most are shorter, if only because the amount is usually much lower than with a Secured loan. Some lenders may also allow occasional over-payments (if, for instance, you found you had a little extra money one month) and lump-sum payments alongside the usual pre-determined fixed monthly payments. This is because, without the security of a secured asset, the lender wants their money back as soon as possible – the less time it is out of their hands, the less likely it is, in their view, to be lost. Interest rates tend to be much higher, calculated by your income and credit history, to ensure the lender is not left wanting. Secured loans, then, will normally have a longer repayment period because the collateral held by the lender allows them to relax slightly about their money – they know they will get it back one way or another. Payments are made in agreed monthly installments, and terms usually last between three and twenty-five years. Interest rates are also lower to reflect the longer repayment period. Therefore, Unsecured loans are suitable for short-term projects (for those with the money readily available to meet installments at least – see below), while Secured loans may be better for those who need money over a period of time, or who do not have enough income to pay off their debts in larger amounts.

Personal financial circumstances

Your personal finances, credit history in particular, will also have an effect on which kind of loan is most suitable for you. Because of the recession, lenders are becoming less willing to loan money to those with a poor credit rating, because this increases the risk to them. Where there is no security on the loan, lenders will normally set interest rates based on the borrower’s credit rating. They are therefore also likely to charge higher rates of interest on Unsecured loans for those with worse credit histories in order to recoup their money. Those with a poor credit history may find, then, that they are more likely to be accepted for a loan, and given a better interest rate once they are accepted, if they can offer an asset as collateral for a Secured loan. A Secured loan is also a more viable option for those who are self-employed, or who have recently changed jobs as both of these factors affect your desirability in the eyes of a lender.

Risk assessment

Risk levels should also be taken into account. What eases the mind of the lender works as a bane for the borrower – a Secured loan puts your home, car, or valuables on the line. If you fail to meet your repayments, you risk losing it. If you do not think you are capable of meeting repayments, it may not be wise to risk your property. Unsecured loans do not carry this level of risk, but failure to pay will still damage you financially – be it in affecting your credit rating, or hitting you with late payment charges.

Think carefully, then, before deciding which kind of loan to choose. Take into account all the above factors. For a small, personal, short-term loan (e.g. for funding a wedding, or a similar one-off expense), an Unsecured loan is probably the better option. Secured loans are much better for those who may have poorer personal finances, or who need a more substantial and on-going loan. The bank, building society or broker you take out a loan with will advise you on what is best for you.

Bad Credit loans:- The name says it all – this is a loan tailored for those with a poor credit rating, CCJ or a blacklisting. These loans typically have higher interest rates but can be helpful in ultimately improving your credit rating (see Improving Credit History).

Bridging loans:- This is a loan for those moving home, and comes in two forms. A closed Bridging loan is for those who have sold their old house and secured purchase of the new, but need money to complete the payment. An open loan is for those who have bought a new home before selling the old. The latter is much less favoured by banks because it creates more of a risk for them.

Car loans:- This is, obviously, a loan created solely for purchasing a car. This loan is normally executed as a ‘Hire Purchase Agreement’, which means that the buyer essentially hires the car from the lender until the repayments are completed. The loan is normally secured against the car, so if payments are not met, the car can be repossessed.

Debt Consolidation loans:- You’ve all seen the adverts for these on television – this is a loan that rounds up all a borrower’s outstanding loans and corrals them into a single monthly payment, usually with a lower interest rate. This is very useful if debts are becoming hard to handle.

Home loan:- Also known as a mortgage. This is a loan taken in order to buy property, and is secured against the house.

Home Equity loans:- Sometimes known as a second mortgage, this is secured against the equity of your home (the market value of it versus the amount left to pay on the mortgage) to offer a low interest loan for any purpose. Lenders normally require the borrower to have started to repay the mortgage in order to increase the equity.

Home Improvement loans:- Used for making renovations, this is normally secured against the house but can also be taken independently from the mortgage.

Homeowner loans:- This is a secured loan that specifically uses the house or equity as collateral. Because of this, the interest rates are usually lower.

Pay Day loans:- This is a short-term loan which is essentially an advance on your monthly paycheque should you find yourself a little strapped for cash. It is paid back once your wage is received.

Personal loans:- These are unsecured loans given for any personal purpose. They are normally relatively small payments, and the loan length is fairly short (generally 1-10 years), but personal circumstances are taken into account in deciding these factors.

Secured loans:- This is a loan that uses any valuable asset as collateral on the payments. This means that interest rates are typically lower.
Unsecured loans:- These do not require any collateral, so are less flexible and usually have higher interest rates than Secured loans. They are suitable for those with good credit history who require a small personal loan.
Payment Protection Insurance:- This insurance can be taken out on a loan to cover your repayments, should your income be affected by unemployment or illness. It is not a necessity, and some argue that it is actually detrimental to one’s finances as policies can cost exorbitant amounts. However, as with all insurance, the cost of the policy usually redeems itself when and if an incident occurs that requires it to be enforced. It may be worth considering for longer length loans, if only to provide peace of mind.