Borrowing with Bad Credit (The Ultimate Guide)

Borrowing with Bad Credit (The Ultimate Guide)

What is bad credit?

A low credit score may mean you have bad credit while a high score shows you are good at managing debt. Lenders like people with good credit as they are more likely to make repayments on time and in full. However, you may have a low credit score if you haven’t borrowed much before.

Banks and other lenders make their money by offering you a loan and then charging interest on it – they want to say 'yes' to your application. However, sometimes people who take out credit can't pay it back, which means lenders lose money on the loan. These companies need a way of working out how likely it is that you'll make the repayments. They look at your credit file (more information on this below) to calculate how risky it would be to accept your application, so that they can avoid losing money to customers who can't pay them back.

If you have bad credit, it doesn't mean you won't be able to get a loan. You may be charged a little more than if your credit history was spotless (it’s to be expected) but even with poor credit there are deals to be had, so be savvy and compare your options before you apply.

    Video guide

    What is my credit score?

    A credit score is a number used by credit reference agencies to give you and lenders an idea of how good you are at managing your money (your ‘creditworthiness’). This score is made up from a number of personal factors from how often you’ve moved house to whether or not you’ve paid your bills on time. When applying for any kind of personal finance your credit score plays a major part in whether or not you’ll be accepted. Your credit file is basically your financial passport, so it pays to look after it.

    Your score is calculated by the credit reference agencies, who collect information about you from the electoral register, banks, lenders and the government. Before you can see any personal information, you'll need to sign up and enter some private details to let the company know who you are and to make sure you aren't pretending to be someone else. If you are concerned about the privacy of your data, make sure you're in a private place when you do this (not using WiFi in a café or hotel).

    Only three credit reference agencies are licensed to operate in the UK – CallCredit, Equifax and Experian. Confusingly, each company provide their scores in a different format. There are number of sites where you can access your score for free:

    ClearScore for example, allows you to look back at how your score has changed over time, so you can keep an eye on whether your score is going up or down.

    How did I get bad credit?

    Most commonly, bad credit is a result of a history of either missing, being late or defaulting on credit repayments. Any time you enter a credit agreement it will be recorded on your credit file. This is means any repayment history (even your gas bill, your phone bill or that washing machine you’re paying back in instalments) will impact your credit file.

    'Why do I have a bad credit score? I've never borrowed money in my life!'

    If you've never used credit, there is no proof that you can manage and make repayments in full and on time. Although having no credit could be considered different to having bad credit, lenders will still think you are risky and you are likely to have a low credit score. One well-known way of building a better credit score is to take out a credit card and use it regularly for higher value items. You should pay off any debt before the end of the month, or by making the minimum payment and then paying off the full amount before the interest-free period runs out, to avoid losing money.

    Compare Cards

    Credit-builder credit cards can help you to build up your credit score over time. There is a full range of credit-builder cards available to compare in the comparison table.

    There are lots of different ways that you can end up with a bad credit score. Your credit file is made up of huge range of detailed information collected by the credit reference agencies. If you want to work out why your credit score is low (or high!), these are the sections of a credit file which can affect your score and the questions you need to answer:


    Is your name correct on your file? Have you got the same surname on all your bank accounts and cards? Do you share a name with someone, or could someone have stolen your identity?

    Current address

    Is your address up to date? Are there any mistakes in the way it is written? Have you only moved there recently?

    Previous addresses

    Have you moved around a lot? Did you spend only a few months at each place? Are there any errors in your past addresses or gaps?

    Electoral register

    Are you registered to vote? Are you on the open or closed electoral register? Have you registered at your current address yet?

    Who you’ve held/hold joint bank accounts with

    Have you got a joint account with someone who has bad credit? Did you used to share an account with someone who went bankrupt or missed card payments?

    Who you’ve lived with

    As with joint accounts – did you share an address with someone who has bad credit? Are you married to someone who often misses payments or has a lot of debt?

    Problems with repayments and debt

    Did you miss an instalment on a phone contract? Was there a time when a company tried to collect a bill payment and your account was empty? Are you in debt?

    Legal problems and court judgements against you

    Have you ever been declared bankrupt? Have you been taken to court over an issue with money?

    If you think a lender would be worried by any of your answers to the questions above, then it's likely that the problem may have affected your credit score. Bad credit isn't always your fault – sometimes it's a mistake by a company you had a contract with, or the actions of someone you lived with that have given you bad credit. If you have bad credit, don't worry – there are still plenty of options for borrowing, such as guarantor loans.

    Why does my credit score matter?

    Your credit score is used by everyone from loan providers to phone contract sales and lettings agents, to work out whether you can be trusted to use credit and make payments on time. So it’s crucial to understand the status of your credit file before searching for finance. Applying for a product that isn’t suited to your circumstances means you risk being declined which will only further damage your credit score.

    Understanding my credit file.

    The score and information you will be given by the three different credit reference agencies is likely to vary (see 'What is my credit score?') .

    Your credit score isn't a set number – each credit reference agency scores you differently. The highest possible CallCredit score is 1000, but Equifax only goes up to 700. However, when using sites such as Noddle or ClearScore you’ll be able to see whether your score is considered very poor, poor, fair, good or excellent.

    In the 'Report' section of the credit rating websites, you can see your personal information – address history, bank accounts, credit cards and loans.You can also look through your ‘Search History’ – each time you check your credit score or a company has a look at it, the search will show up here. Any county court judgements (CCJs), bankruptcies and insolvencies can also be seen here.

    When reviewing your credit score it’s extremely important that you make sure the information it is based on is accurate. A mistake on your credit file could badly impact your credit score (see the next section for how to fix a mistake).

    Fixing mistakes on my credit file.

    What happens if you're looking through your credit file and find something which shouldn't be there? The smallest mistake can be a big deal when it comes to applying for a loan or card and it can even affect your partner or housemate's chance of getting approved for credit. There are stories of people missing out on their dream home or failing to get a mortgage because of tiny errors on their credit file.

    Make sure you've gone through your credit file with a fine toothed comb (have a look at the 'What is my credit score?’ section), including checking that any settled CCJs (County Court Judgements) that should have come off your record have been removed. Make sure that you aren't financially linked with anyone you're no longer in contact with (eg. old housemate, ex-partner.) By the time you've finished, you should have an in-depth understanding of your credit file. If you did have any mistakes it’s now time to sort them out...

    STEP ONE – Contact your creditor

    If you’ve mistakenly had a missed payment reported on your credit file contact the company in question (the ‘creditor’) directly, asking them to correct the error on your credit file. Hopefully this will be enough to fix the problem – if not, then...

    STEP TWO – Gather the evidence

    Go through your old bank statements and letters from the creditor. Send them a copy of any old documents or emails which will support your claim that the company has made a mistake. The creditor should then start an investigation, update their records and let the credit reference agencies know (this may take up to a month). If you can't wait long enough for this fix to work, then...

    STEP THREE – Quick fix

    If you're applying for money on a deadline such as a mortgage application, you can speak directly to the credit reference agency and ask them to put a note on their system. This will show that an error has been fixed. However be aware this can take a month to roll out and may not be enough to convince a lender that the problem is resolved.

    Bad credit options.

    Improving your credit score isn't just a quick project – it's a long journey. So what happens if you need money now and you have bad credit? You have plenty of options.

    FREE: Financial health check

    Take out a sheet of paper or open a new document on your computer. Check your bank statements to find out all your income and outgoings over the past few months. You should calculate what you're spending on food, nights out, pets, petrol, rent, your collection of sock puppets etc. We created a free budget template to get you started. There are also apps such as Money Dashboard, which can help you make and keep to a budget.

    Have a look through the list and ask yourself if you reallyneed everything you've written down. Work out what you could cut back on – anything from meals out to garden ornaments or new gadgets. Give yourself a budget for things you can't avoid, like food, and rent then stick to that budget. If, even after making cutbacks, you’re still struggling to make ends meet then look at the Struggling with Debt section below. Alternatively, visit the Money Advice Service

    CHEAP: Bank of Mum and Dad

    The cheapest way to borrow money for many people is by asking their parents or close friends. This can be a much cheaper alternative than applying to a commercial lender as you could benefit from a low (or potentially zero) interest rate with more flexible repayments. It might be embarrassing to ask for help, but it could save you a lot of money and could avoid you getting into debt. Just be sure to talk through what will happen if anything goes wrong before coming to an agreement.

    VARIABLE: Credit cards

    If you don't have access to the Bank of Mum and Dad, you could take out a credit card to use for purchases. Make sure you compare cards with 0% introductory purchase periods, and that you always make at least the minimum repayment every month. If you want to borrow because you need to pay off existing debt, compare cards with 0% balance transfers and check what the transfer fees will be for moving your money around. Credit cards can be an expensive way to borrow if you have a big transfer fee to pay or fail to clear your balance by the end of the introductory 0% period.

    MODERATE: Guarantor Loans

    If you’ve taken a few knocks to your credit file in the past but are now on a firm financial footing a guarantor loan could be an option worth considering. To apply for a guarantor loan you will need a guarantor to support your application. In most cases this is a friend or family member. A guarantor can often borrow more, at a cheaper rate. This is because your guarantor will be required to cover your repayments if you’re unable to do so. That means you need to think very carefully before applying. If you are not 100% positive that you can afford the repayments then do not apply as those closest to you will have to pick up the pieces. You can compare all UK guarantor loans with our guarantor loans comparison table

    EXPENSIVE: High Cost Short Term Loans

    High cost short term loans(as the name suggests) are designed for borrowing money over a short period of time to cover an emergency or unexpected cost. They are not a solution for long term or sustained borrowing. If you have any doubt that you can meet the repayments then as always do not apply.

    If you're not sure what loans are available to you and how much they might cost, use our Eligibility Checker to find the most suitable options for you to compare.

    Comparing cards and loans

    Now that you know your credit score, you know if you need to look for 'bad credit' products or 'good credit' products. Choose Wisely will let you to compare different products for badorgood credit scores, so that you can find a great value deal which suits your needs:

    Struggling with debt?

    If you feel like you're drowning in debt and you're struggling to stay on top of all your expenses, there are a number of free debt charities that can help you. If you're having problems with debt, then these services can give you room to breathe and get yourself back on track.

    Declined for a loan?

    If you've been declined for a loan, don't panic, you aren't alone. You just need to follow some simple steps to get back on track.

    Stop applying.

    Don't apply for any more finance until you've worked out exactly what went wrong.

    Each time you apply for a loan, the search will show up on your credit file. Lots of searches suddenly appearing will make you look desperate for cash, which lenders will think is risky.

    STEP ONE – Check your credit file

    This step should come before anything else. If you haven't looked in detail over your whole credit file then you may have a nasty surprise when applying for a loan. You should know your score and what is on your credit file at each of the three major credit reference agencies before applying for a loan or card. Read the 'What is my credit score?' section above for more information.

    STEP TWO – Get in touch with the lender.

    If a lender has rejected you, they may have already let you know why. If they haven't, get in touch with them via email, live chat or phone. Ask them politely if they could explain why your application was rejected. Lenders don't have to give a reason for rejecting your application, but the smaller lenders focus on customer service so they may help you out. If they don't tell you exactly why you didn't succeed, they still might tell you which credit reference agency they used for your credit check.

    STEP THREE – Understand exactly what went wrong.

    If the lender says that they have used a particular credit referencing agency, go and double check your personal information on the website (have a look at 'What is my credit score?') . Check that there aren't any errors on your credit file and that everything is up to date and accurate. If there are any mistakes on your record (even if they seem small), you will need to fix them .

    If the lender thinks that you have bad credit, and they only lend to people with good credit, then you're looking in the wrong place. Have a look at the loans for bad credit comparison table.

    STEP FOUR – Wait before applying again

    If you can afford to wait before getting a loan, then do. This is even more important if you've been putting in lots of applications. Come back in a few months when the bad credit score you've built up from sending off lots of applications in one go has worn off. If you can't afford to wait, then look at your bad credit options above. Still looking for a bad credit loan?

    Find Loans

    Use the Choose Wisely Eligibility Checker to find a suitable lender in just a few minutes, without impacting your credit score.

    Written by Chris
    Published on 13th July 2017
    Read more from Chris