A bad credit score means that when your credit file is evaluated, you are deemed to be a risk when borrowing money.
If you have a low credit score lenders and providers may think there is a high chance you won't pay back the money borrowed, or that they simply don't know whether you are likely to repay on time and in full. For more information on how your credit score is determined, read our guide on Understanding Your Credit Score.
Credit scores are based on your previous lending and therefore a bad credit, low credit score, or no credit footprint can simply be there because you haven't borrowed money in the past or had a contractual agreement of any sort, whether it’s for a credit card, loan or mobile phone contract.
If you currently have a poor credit score, there are things you can do to improve it and ways that you can still borrow money.
Read on for more information on bad credit scores from the Money Guru.
Who decides if I have a bad credit score?
There isn’t a single person or entity that decides if you have a bad credit score. Credit scores are very changeable. They are affected by previous borrowing history and are there to establish how "creditworthy" you are.
For example, an attempt to get credit will remain on your credit score for twelve months. A missed payment could remain on your credit score for up to seven years and bankruptcy could be on there for ten years.
If you have no previous borrowing experience – say you're at the beginning of your adult life and you would like to move out of your parents’ home and buy your own house – this can also work against you. With no previous record of the way you behave with borrowed money, you are an unknown entity to lenders.
What effect will a bad credit score have on me?
The single biggest effect of a bad credit score, is an inability to obtain credit.
Whether you need a loan for home improvements, you want to take out your first mortgage or perhaps you want to make a purchase on credit such as furniture or a car, they will all be affected by a poor credit record.
When in this situation, it can feel impossible to improve your credit score.
How can I improve my credit score?
You can improve your credit score but how you do it will differ slightly depending on your situation – whether you have no credit history or a poor credit history.
If you have no credit history, you can start borrowing by:
1. Getting a credit improving credit card
This will normally have a lower balance and higher interest rates. However, by making smaller purchases and paying off in full, you will begin to build a better credit rating. Just remember, never take out cash on a credit card as you will most likely be charged and always pay in full at the end of each month.
2. Use a guarantor
A guarantor loan is where someone vouches for your reliability and promises that if you can't make repayments, they will cover the cost of the loan. This is particularly useful for young people just beginning to build their credit score.
3. Start with smaller sums
A good place to start could be making a purchase such as piece of technology or signing up for a monthly phone contract. These smaller, regular payments will prove you are reliable with your money and make it more likely that you will be able to access larger sums of credit later on.
If you have a poor credit history, you can:
1. Secure your loan
A secure loan will offer the lender some security on their money. For example, if you didn't make the repayments they could repossess your car or home to make the repayments. While this sounds scary, lenders will do a full credit check on you before they lend you any money and they won’t accept your application if you are not financially able to afford payments each month.
2. Bad credit loan
A bad credit loan is simply a loan for those with bad credit. They can be personal loans, short or long term, secured or unsecured. They can be used for a number of reasons too, including emergency situations such as a broken down boiler or car repairs, or for non-emergencies, like home improvements.
3. Use a guarantor
Asking someone with a higher credit score to guarantee your loan, meaning that they will pay back the loan if you don't, is another way to access credit you wouldn’t otherwise be able to. You will need to ask someone you trust – and who trusts you – and these loans do tend to come with a higher interest rate. However, they're a good place to start when rebuilding a bad credit score.
To find the right loan for you, even with a poor or no credit history, head to our moneymatcher now. There we compare the different loans available, which can help you start to build a better credit score for the future.
Available to those on certain benefits and in cases of great need, these loans are provided by the government and are interest free. As they are only offered to those on certain types of benefits, it is best to contact the Job Centre Plus about these loans.
Credit Building Credit Card
Credit building credit cards are a good way to start small. With a low balance and high-interest rates, it is best to borrow and pay in full each month to prove you can manage your money. Although not a solution to needing large amounts of credit, they are a great way to start building a higher credit score.