As capitalist societies brace for a double-dip recession, many consumers and small businesses are experiencing difficulties obtaining credit. While applicants with relatively good credit histories are struggling to find affordable lenders, those with poor or non-existent credit profiles are finding the task extremely difficult – but not impossible, as the guide below will explain.
A credit rating can be defined as a numerical expression of an individual’s capacity to settle debts: a measure of risk that is used by lenders to decide whether an application for credit should be approved or rejected. Obviously, an applicant who has a poor credit rating is less likely to be approved for a loan, credit card or mortgage than an applicant whose credit history is good or excellent; however, it should be noted that a good or poor credit rating is not always the deciding factor in an application for credit.
There can be many reasons why an individual might have a poor credit rating. Typical causes include defaulting on past credit agreements and bankruptcy, while County Court Judgements (CCJs) and other legal notices can be placed on a credit profile for a number of years (usually up to six). Shaking off a history of bad credit can take a considerable amount of time and effort.
Poor credit ratings also can be caused by having no credit agreements in place over a certain period of time. No evidence of a credit history is sometimes worse than evidence of a poor credit history, but in either case the consequence for applicants is the same: applications for credit are usually rejected. Overcoming a poor credit history can be a Catch 22 scenario for people whose failed loan and credit card applications merely serve to worsen an already dire credit profile, thereby reducing any hope of obtaining ‘good’ credit.
Good credit is not everything, however, as there are reasonably reputable lenders in existence who make a business out of offering credit options to people with bad credit histories. The only problem with this is that credit options of this kind are invariably subject to high rates of interest and very low borrowing limits. One way or another, people usually end up paying a price for questionable credit decisions made in the past.
Credit cards designed for people with bad credit ratings will not be subject to the same rates of interest as standard cards, which typically range from 6 to 19 per cent APR; in fact, even cards with interest rates between 20 and 25 per cent might not be considered `bad credit` credit cards. In most cases, people who successfully apply for bad credit credit cards can expect to pay interest rates of between 30 and 50 per cent.
Bad credit lenders include Capital One (Progress), Barclaycard (Initial), Aquacard and Vanquis. These providers vary in terms of eligibility and lending criteria, but most accept people with poor credit ratings. Although the high rates of interest and relatively low credit limits might put off many people, those with poor credit histories can use such cards to rebuild their credit profiles. After a year of making monthly repayments on time, a person`s credit rating is likely to have increased markedly – so the high interest rates and low credit limits are of secondary importance to the opportunity to improve a credit profile.
Finally, people who are turned down for credit cards and mortgages may wish to consider a loan for bad credit. Although subject to high rates of interest, any such loan can help to improve finances in the short-term whilst serving to rebuild a credit profile – providing, of course, repayments are satisfied in full and on time without exception.