Poor Credit History and Bad Debt
What is a "Poor Credit History"?
If you have a poor credit history, it might be because you’ve defaulted on a previous loan (that is, failed to pay it back) or missed some of your payments. It could also be because you’ve been declared bankrupt, or been issued with a County Court Judgment.
Companies called credit reference agencies hold detailed files on everyone who has applied for loans or credit cards. Banks and other lenders use these agencies to run credit checks on borrowers to determine whether to lend to them. Everyone has a score which reflects the risk they might represent to lenders. The worse your credit history, the lower your score will be.
Running up a poor credit history may not have been your fault. It may have been the result of things beyond your control, like losing your job. The credit scores do not take account of any such reasons. Even when it’s not your fault, if you have bad credit (or "adverse" credit, as it’s sometimes called), you might it difficult to get a mortgage, to finance a car or even open an ordinary bank account.
It’s worth bearing in mind the difference between "good debt" and "bad debt". Good debt relates to things that will increase in value and might add to your wealth. The classic example of this is a mortgage loan, which is used to buy your home. Another example would be a student loan, taken on to help you get a better career.
Bad debt is debt used to buy things that don’t appreciate in value - quite the reverse, in fact. Credit cards used to buy clothes, food and holidays come into this category.
How to repair your Poor Credit History
If you have bad credit history, don’t despair. There are various things you can do to improve the situation. The first thing to do is to take a look at your credit file, which you can do by contacting the main credit reference agencies and requesting it. Look around, free credit scores are offered by some agencies, others incur a small cost. If any of the details are incorrect, you might be able to have them fixed. Paying all your loan payments on time in future will start to increase your credit score. It’s also important to ensure you’re on the electoral roll.
Can you trust the adverts to write off your debts?
There are various types of debt help. The most obvious are the various companies who deluge daytime TV with adverts offering to wipe out your debt. Are these worth using?
That will depend on your circumstances - and on the type of help they are offering. A common route is the debt consolidation loan offered by some companies. If you have a number of credit cards, this looks appealing because they take on your debts and you then pay a single payment to them. This will usually be a lot lower than the sum of various card payments. However, such companies often extend the loan period. As a result, you could end up paying a lot more in the long run.
There are also various routes to write off your debts. We look at this whole area in more detail in another article.
What to do when loan companies threaten you
Because it was so easy to obtain credit in the past, many people got into difficulties by running up significant amounts of debt - and then being unable to make their repayments because of redundancies or other problems.
Many people quickly found that the lenders who were eager to welcome them in when their credit rating was good quickly became aggressive, threatening legal action and demanding the repayment of the entire outstanding loan.
This can be very worrying. Some people have suffered serious health problems, depression and even committed suicide as a result of this pressure. The most important things to do are:
- Don’t ignore threatening letters from lenders. They won’t go away.
- Write to the lenders, explaining your circumstances and offering to pay a reduced payment for a while. Many lenders will respond well to this approach, as it shows you are cooperating in trying to overcome the problem.
- Get advice from a Citizens Advice Bureau or a debt counsellor.