A bad credit rating happens when the borrower fails to comply with the terms and conditions of a credit agreement. Any missed and late payments will be reported to the three leading credit reference agencies (Experian, Equifax and TransUnion). Future lenders perform a credit scoring process and the outcome determines whether that individual can borrow money and on what terms.
Applying for Unsecured Credit with a Bad Credit Rating
A low credit score decreases the likelihood of the customer being approved for a loan or credit card. Whilst minor adverse credit – a late payment – may just mean that the cost of borrowing is higher, a very poor credit history will lead to a decline for most unsecured products. This is because the majority of lenders will deem the risk of the borrower defaulting too great.
Secured Adverse Credit Mortgage Loans
It may still be possible to get a secured loan, but the APR will be higher. Lenders use the equity (difference between the property value and the loans secured on it) to determine how much they are prepared to lend. Should the customer default on a secured lending arrangement, this could lead to the eventual repossession and sale of the property. A bad credit rating reduces the borrower’s options.
A Poor Credit History Affects the Cost of Insurance
Insurers have identified an inextricable link between the cost of insuring someone and a bad credit rating. Customers with a poor credit history are more likely to make a claim on a policy than those with a reliable repayment history. Not surprisingly, many insurers are now using credit scoring to determine monthly premiums for car, home and life insurance. A low credit score means a higher premium.
Credit Report Errors Could Mean a Low Credit Score
Whilst a poor credit history is normally the result of defaulting on a credit agreement, this isn’t always the case. A number of credit reports contain erroneous information. Whilst this may seem harmless enough, it creates the same problem as a adverse credit. It is sensible to get a free credit report and check it for errors before applying for credit. The Fair Credit Reporting Act gives the consumer the right to correct these issues personally or through a credit repair attorney.
Recovering from a Low Credit Score
A bad credit rating isn’t something that can be repaired over night. In order to recover from a poor credit history, it is important to start making loan, mortgage and/or credit card repayments punctually. Should adverse credit be a result of inaccurate data, get the information corrected through the appropriate channels. Allow a minimum of six months for this to take place.