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Breaking Barriers: Overcoming Bad Credit on the Path to Financial Wellness

It is no secret that financial difficulties and worries can impact our mental and emotional wellbeing.  If you have bad credit, it can feel like you are climbing an insurmountable mountain, especially if you  need to borrow more. 

The good news is bad credit is a problem that can fixed if you know how and understand what you  need to do to maintain your credit score going forward. So, say goodbye to sleepless nights and get  on top of your finances once and for all with our bad credit guide. 

Let’s jump in. 

Understanding Debt 

Debt is often a term that carries heavy negative connotations, but the truth is, almost everyone will  be in debt at one point or more in our lives. Debt is not bad, for example, if you have manageable  debt, it can be an extremely useful tool to structure finances sensibly. 

If you ever buy a house, you will probably need a mortgage to make up the difference between your  deposit or down payment to the total property value. Although most people with mortgages don’t  associate their mortgage with debt, they are in fact debt and quite substantial debts at that. 

Debt becomes a problem when you are unable to keep up with repayments, when you are borrowing  simply because you can, or when you are borrowing more to pay off old debt. 

What is Bad Credit? 

If these abovementioned debt problems continue, you will often find your credit score begins to  drop. Ultimately leading to bad credit or an adverse credit score. 

A bad credit score reflects your risk to lenders. For example, if you have a bad credit score you will be  seen as a high-risk borrower who might not repay the money that is lent to you. 

If you have an excellent or good credit score you will be seen as a much lower risk to lenders and you  will be able to borrow money at more competitive interest rates. 

You can consider the interest rate you achieve on a loan as a penalty for the risk you represent to a  loan company. If the interest rate is high, you are considered a high risk and if your interest rate is  low, you are considered a low risk. 

How is Your Credit Score Calculated? 

Credit scores are calculated by Credit Reference Agencies. There are 3 main Credit Reference  Agencies in the UK: 

  • Equifax,
  • Experian, 
  • TransUnion. 

These Credit Reference Agencies have different ways of assessing your creditworthiness and use  proprietary algorithms to calculate the risk you represent to lenders. 

You may find one Credit Reference Agency has a fair score for you while another has you marked as a  bad credit borrower. It is worth checking your credit score across all 3 Credit Reference Agencies and  then matching the agency with the best score to a lender. 

For example, if your score is good with TransUnion, you should seek out a lender that uses  TransUnion as their Credit Reference Agency. 

Bad Credit Scores and Emotional Wellbeing 

Historically, bad credit and debt problems have been swept under the rug and little attention has  been paid to the psychological impact debt has on people’s lives. 

Thankfully this trend is reversing, and more organisations are beginning to explore and help people  suffering with debt problems. 

The key here is if you need help, you can reach out to others who will be sympathetic, non judgemental and can assist you with emotional support and financial advice. 

Debt Charities Can Help 

One such organisation that does just that is StepChange. They are a debt management charity with  qualified debt advisers who will listen to your problems and then help you create an action plan to  tackle your debt and get onto the path of financial freedom. 

Debt problems can always be resolved so you should feel confident that no matter how big the hole  you feel you are in, that you can climb out and restore your credit profile. 

What Can You Do to Improve Your Credit Score 

There is no magic want solution to debt problems unfortunately. Fixing your debt problem will take  discipline and willpower and may take many months or even years to fix entirely. 

There are several ways to improve your credit score: 

  • Repay any problem debts (partially or fully), 
  • Keep up with monthly payments, 
  • Avoid borrowing unless necessary, 
  • Registering to vote at your home address, 
  • Speak to your creditors where debt is unaffordable. 

Speaking to your creditors is a crucial step to debt freedom as it will allow you to explain your  situation to them and listen to their proposals. All regulated lenders in the UK must abide by a strict  code of conduct and help if you are struggling to repay your debt. 

They may suggest a lower monthly payment, an interest-only payment, or the option to settle the  debt by making a one-off payment.

Bad Credit Financial Products – Credit Builder Cards and Loans 

If you must borrow money, or you want to borrow money to improve your credit score, there are  credit builder loans and cards available from specialist bad credit lenders. 

These loans typically have a very low borrowing amount, and the idea is to pay the debt back on time  and in full. Each time you do this you will notice a small uptick on your credit profile. 

These credit builder loans only work if you have minor problems on your credit record like missed  payments or a single default. 

If you have County Court Judgements, Bankruptcy, or multiple defaults on your credit record, any  positive you achieve by using a credit builder loan will be offset by the damage the ongoing problems  are causing. 

In these circumstances you should clear defaults, pay any judgements in full and seek to discharge  your bankruptcy. It may take 6 years for the negative impact to disappear from your credit score  altogether. 

Comparison Website for Bad Credit Borrowing 

The first bad credit comparison website has just launched in the UK allowing you to compare loans  and credit cards if you have adverse credit. 

A comparison website is extremely useful as it allows you to achieve the best interest rate for your  circumstances, be preapproved for finance and match a lender with the Credit Reference Agency  most favourable to you. 

If you have bad credit and you need to borrow money, the bad credit comparison website is the best  way to borrow sensibly.

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