Today I wanted to write a little about bad credit, making applications for credit and the cycle you can get stuck in where you keep applying despite constantly being declined. It’s a bit like when you are desperately applying for a ton of jobs and you fire off your CV to a number of potential employers and agencies.
There are some similarities in my mind. You could argue employers in the case of payday loans would be a direct lender, and an agency could be like a broker where they advertise one job (that does or doesn’t exist), or in the case of this analogy, a payday loan product but then try to sell you something else all to make a quick buck out of your desperation.
Of course the above view is a little cynical but those of you who have made applications to so called brokers will understand where I am coming from. This post will be a collection of my thoughts really about bad credit, hopefully I don’t ramble on too much!
The problem with your credit history is the time it can take to recover, although in some ways this is also a good thing and I will talk a bit more about that later on. For example let’s say you have a terrible credit history because you have a number of defaults and lots of searches on your file within a short space of time, you will find it very difficult to get credit for quite some time. Any credit you do manage to get approval for will be due to the help of a guarantor and in most cases the interest rates will be at the very least, expensive and more like shocking.
You may well have some recent credit accounts that demonstrate you are back on top of things but the decision to lend to you is built up upon all of the information contained within your credit report, and it can be hard to escape that bad or the more technical term ‘adverse’ information from your past.
In fact for most account information it will no longer be reported after six years have passed since the information was first registered so in the case of a default, the date you defaulted or in the event an account is closed, six years from the date it was closed. An open account is reported until it is closed and then six years from the date of closure it will no longer be reported.
The reason why information such as late payments or defaults are registered on your credit report is to alert other lenders that you have struggled with credit. This in turn affects your ability to obtain credit and so you shouldn’t be able to make things worse, this is the good thing I talked about earlier.
However a number of financial services providers have spotted a gap in the market and so there is the so-called subprime market. If you see statements such as “We like to say yes” or “past credit problems needn’t hinder your chances of approval” then you are probably dealing with a subprime lender.
Whilst subprime lenders provide a valuable lifeline to many 1000’s of people each and every day, they are also quite expensive. I totally understand that these companies are taking a much bigger risk and that is reflected in the interest rate but to me it doesn’t make sense in some ways. Let me explain. A lower rate loan is going to be much more manageable than a high interest subprime loan. As an example a low rate car loan might cost you £180 per month whereas someone who is subprime could be paying around £315 per month.
What would be better in my opinion and I am no financial expert (clearly) is maybe a car loan that yes at first costs you £315 per month. What if after a year of perfect on time repayments that rate drops each year over the course of the term (example 4 years). Yes it would still be more expensive than someone with better credit but it would certainly be better for the subprime borrower over that time. I know that some credit card providers do this with their interest rate in that it drops over time if your account is well managed. Perhaps we need a product like this for car finance? I don’t know it is just a thought.
When I talk about bad credit, I am basing it on my own experiences and so bad credit to me is really bad credit as in multiple defaults, missed payments and used up credit limits. The only form of credit you can get in my shoes is very expensive and not worth the trouble.
Making Applications for Credit
First things first, before you do anything I would highly recommend you get a copy of your credit report. Take a look at the information on it and make sure nothing is incorrect. This won’t be a silver bullet if you have lots of defaults or other adverse information but it is still worth looking at, especially when in the UK you can get your credit report for free.
So let’s say you have bad credit. What are your options? In the case of Car Finance your best bet is to approach a broker who specialises in customers who have bad credit. If you are looking for a credit card then in the UK Vanquis, Aqua Card and Capital One may be able to help you. Payday Loans are usually pretty accommodating but I wouldn’t recommend them.
The important thing is not to make loads of applications at once. You should look at the lender in question and see if you can work out if they are likely to lend to you or not. Remember though that even if they do, it will be expensive. 🙁
Breaking the Cycle
For some of us, we got bad credit through no fault of our own. For others (myself included) it was due to financial irresponsibility. So before rushing off to get a car on finance ask yourself, ‘is it worth it’? I will tell you a little story now.
A few years ago my credit was very poor (and to be honest it is still pretty bad today), I sold a car I had on finance because it had some equity which would allow me to purchase a cheap run around. The idea at the time was it could have saved me around £215 per month. Not bad all things considered.
I go ahead with all this, buy a cheap run around and fate decides to screw me over and I end up with a dud car. At the time, it was not possible to get public transport to my place of work or even cycle there so I was a little bit up the creak without a paddle.
Fortunately another car finance provider was waiting to scoop me up and feed me one of their loans. All said and done? I pay £315 per month for a car and at the end will have paid twice its original price.
The moral of the story? If you are accepted please understand what you are letting yourself in for, especially if you are getting a car on finance with bad credit. The Interest rate on these loans are just insane. If I could turn back the clock I would have run away from the deal and found another solution that didn’t involve credit.
To break the cycle of continual rejection when applying for credit requires some determination. Your credit history needs time to heal. This means letting your adverse information get older and not applying for credit. In addition you should keep any of your current credit accounts up to date and paid on time as this will do wonders and you should start to see some improvement in the future. It is hard to give a time frame really for this but based on past experience around two years but everyone is different so take that statement with a pinch of salt.
The last statement is quite generalist of course because if you have an IVA or have been declared bankrupt for example, there will already be restrictions in place for when you can apply for credit. You will normally have to wait for your formal arrangement to end before entering the world of credit although I believe there are some exceptions to this rule.
However for those of us who have defaults and lots of late payment markers, give it time and your credit history will slowly begin to heal.
Image: Stuart Miles / FreeDigitalPhotos.net