In 10 years in London, there is an upsurge in expenditure has proliferated such as prises uplifted in basic essentials like food, utilities, and housing and squeeze on living standards, a changing jobs market, a new direction for government policy, a shake-up of the regulatory framework - due to these reasons, there are rising problems such as a history of missing repayments on credit cards or loans or have had trouble keeping up with bills. This all factors affect the "credit score" which is referred to as having a "bad credit score"
Reasons for a bad credit score is
- Paying less than your minimum monthly payment amount
- Making monthly payments late or missing them completely
- Going over your credit limit
- Not clearing any debts
According to the National bank of England, the people mostly are in debt due to household expenses, unemployment, or sudden GDP crises.
The UK’s fluctuating debt landscape such as with rising demand, more arrears on household bills, and increasing complexity of problems like shifts in the way we think about problem debt, and concerted response from the government, regulators, and creditors.
What is Bad Credit?
If anyone has a history of missing repayments on credit cards or loans or has had trouble keeping up with bills, it affects your credit score, which is referred to as having bad credit. People with bad credit scores find difficulty in borrowing money from lenders, whether it's a loan or credit card, or mortgage. That's because lenders don't take a risk of giving loan to people with bad credit by risking the repayments.
Credit Information held by CRA
Credit information is gathered and held by credit reference agencies (CRA), and in the UK there are three – Experian, Equifax, and TransUnion.
Lenders also send credit information to CRAs. Other important information including whether you’ve ever been made bankrupt or have County Court Judgments against you or your business is also included in your credit report.
The Credit reports of people are updated every month and the data of credit is held for 6 years. CRAs have different numerical scales. Experian’s top score is 999 and any score between 881-960 is considered a good score, while it’s 710 for TransUnion and 700 for Equifax where 420-465 is good and anything higher than 466 is excellent.
What is a TransUnion Score?
TransUnion is one of three important credit reference agencies in the UK used by lenders when deciding how possible a borrower you are and how much money they can make from you. A number of factors depend on your credit report which can make up your credit score, which ultimately places you in a rating group ranging from very poor to excellent.
TransUnion uses everything it knows about you in your credit file and boils it down to a number. If you contain a good score, you can usually be approved for a loan, credit card or mortgage and receive decent interest rates.
- TransUnion: 0-710
- Equifax: 0-700
- Experian: 0-999
There are different criteria for the three different agencies to process a credit score.
What things you should consider if you have a bad credit score :
If your business suffers from a bad credit score, you may struggle to acquire loans from traditional lenders such as banks, or you may get less credit than you want and pay more in fees and interest.
Instead, you may need to look for bad credit business loans and alternative sources of funding. Different lenders are considering bad credit business loans, especially to businesses with good turnover or valuable assets. The criteria and terms for bad credit business loans varies but they can be an option for businesses or owners who have bad credit loans.
However, the interest and fees can be significantly greater. So, if you go for a bad credit business loan, identify the best options open to you and find out exactly how much you’ll have to repay. Finding out the annual percentage rate (APR) of all bad credit business loans you’re offered can enable you to properly compare borrowing costs. Factor in all costs, fees, and interest.
Before taking up a bad credit business loan, take advice from an accountant to know about the costs and likely impact on your cash flow. Some bad credit business loans require lenders to have a guarantor, while others don’t, but these are usually more expensive. Business assets can be helpful to get a bad credit business loan.
What are bad credit loans?
Loans for bad credit are offered to those who have trouble getting credit due to poor credit history. Instead of considering the eligibility for a loan for a credit check, lenders look at each borrower’s individual financial circumstances and identify whether they can afford the loan they are applying for.
So even if you carry a bad credit or have missed payments in the past, you may still try to get a loan.
What different types of loans for bad credit can you get?
If you wanna start a business and have no trading history, you can consider taking a loan from The Start-Up Loans Company. There will be a credit check and money cannot lent to those who are filing for or currently bankrupt or on a Debt Relief Order or those with an outstanding IVA or Trust Deed, on Debt Management Programs or Debt Arrangement Schemes (DAS).
The government helps small businesses with funding without any expectation of repayment so bad credit isn’t a problem. Government grants can come in many forms from cash to free equipment. Government website gov.uk details sources of grants, loans, and support available to small businesses. Applying for a government grant can be a time-consuming and complex process, and there can be restrictions on how you can use the grant.
Business cash advance:
A lender can lend money on the expectations that repayment comes directly from the future sales. As the future sales can be effectively sold to lend at a discount, a bad credit score doesn't count because it's a traditional loan.
Raising money from different lenders who each can contribute small amounts relatively is another option for startups and small businesses looking for working capital. There’s no expectation of repayment on the business’s part although investors will have equity in your business.
These loans require you to appoint a guarantor. This can be a family relative or friend who agrees to repay the loan if you are unable to. With a guarantor, you are more likely to be accepted for a loan.
These are loans, often known as homeowner loans, in which you are required to put up an asset such as your home as security for the loan. For some circumstances if you can't unable to repay the loan, the lender can repossess your home to recoup the loan. This gives a better chance to be approved for loans, but they can put your home at risk.
Peer to peer loans:
These are loans in which you borrow from an individual instead of borrowing from a bank or building society
How to repair your Bad Credit Score?
- Pay bills promptly. Making late payments can impact your credit rating if your creditors resort to legal action to recover outstanding payments.
- Check your credit rating regularly and correct any inaccuracies straightaway. Address errors with the lender or CRA – Experian, Equifax, and TransUnion all offer guidance on this. Mistakes can only be corrected with the lender’s authority and requests are normally dealt with within 30 days.
- Don’t automatically close credit accounts when they’re paid off unless you have to pay for them. While it sounds odd, closing these accounts can have an adverse effect on your business credit rating which, in turn, may limit the amount of credit you can obtain.
- Having no credit makes it impossible to judge risk, which can give you a poor credit score/rating.
- Build up your credit history. If you have some or no credit history, it can be difficult for companies to score you, which can result in a lower score.
- Keep your credit utilization low. For example, if you have a limit of £5000 and you've used £2500 of it, your credit utilization is 50%.A lower percentage is seen as positive light and should help your score go up. To help improve your Experian Credit Score, try to keep your credit utilization at 25%.
There are some tips to do after you recover from a bad credit score?
- Limit the number of credit applications you make. Each credit application will record a hard search on your credit report. Companies can see this, so it's a good idea to space any applications out.
- Keep up with your payments. Delinquent and defaulted accounts will harm your score. Accounts are labeled delinquent when you're late on payments and defaulted accounts are when your relationship with the company has broken down due to several missed payments.
- Only borrow what you know you can afford. If you get into trouble with debt that leads today CCJs, IVAs, or even bankruptcy, these will stay on your credit report for up to six years and will damage your score.