Bad credit used to be deemed something vulgar: a nasty, indelible smear on an individual`s good name; a badge of dishonour and certification of untrustworthiness. Nowadays, bad credit is more or less the norm for society; after all, why should people be expected to maintain unblemished credit profiles when banks routinely lose pots of gold belonging to the public? Bad credit is simply a term describing a credit history that has suffered the odd bump in the road.
Unfortunately, many financial institutions – including those that had to be bailed out by the UK Government – refuse to accept credit as anything other than the Holy Grail of lending: the standard by which all applicants must be judged before borrowing is permitted. People with poor credit histories, therefore, cannot expect every credit card, loan or mortgage application to succeed – but bad credit does not necessarily mean no credit.
Most lenders make provisions for people with poor credit profiles, which are adversely affected by County Court Judgements (CCJs), defaults, bankruptcy, rent arrears, Individual Voluntary Judgements (IVAs) and so on. Notifications of defaults and other credit-related problems can remain on file for years, while mortgage lenders often require full credit histories (including admission of defaults that are no longer on record). Evidence of bad credit almost always works against borrowers (the exception being that no credit history at all is sometimes deemed worse than one that is considered `sub-prime`).
When it comes to mortgages, which tend to be pretty large and scary at the best of times, applicants with a history of poor credit can end up feeling hopeless if they continue to press lenders whose criteria do not include provisions for sub-prime buyers. Fortunately, as more people have fallen into debt over recent years, more lenders are underwriting mortgages for higher risk applicants.
Bad credit mortgages are available to any person who has, at some point in the past, defaulted on a credit agreement or suffered some other financial hiccup that has found its way onto a credit profile. Mortgages for bad credit applicants are also suitable for people who are self-employed or those who have no evidence of prior credit.
Typically subject to relatively high rates of interest, reduced borrowing options and severe penalties, bad credit mortgages are considered to be sub-prime because they are less desirable options for all parties – less desirable but not necessarily least desirable, of course, as no mortgage at all is often worse than one that is not the most competitive.
Choosing a bad credit mortgage requires consideration of various facts and figures, not least the applicant`s ability to meet the monthly repayments on time and without exception. Lenders are likely to apply stricter criteria to applicants with poor credit histories to ensure that repayments do not default, but ultimate responsibility lies with the applicant to consider whether a particular mortgage is suitable for him.
Although intended to finance a new home, a bad credit mortgage can serve to improve an individual`s credit rating, which is essentially a numerical score used to evaluate the risk associated with granting credit to the borrower. A high credit score suggests that a person is likely to meet repayments, having shown evidence of good credit relations in the past. A low credit rating suggests that an individual is at greater risk of defaulting on a debt, having done so in the past or possessing no evidence to the contrary.
Finally, an individual`s credit rating can be so bad as to preclude any hope of securing a bad credit mortgage. Fortunately, credit ratings can be improved by rebuilding credit profiles over time. Obtaining a Tesco credit card to make occasional purchases that are fully repaid each month, for example, can dramatically increase an applicant`s chances of being approved for a bad credit mortgage.
