If you’ve faced financial difficulties, you might be aware that your creditworthiness can take a hit, meaning lenders are less likely to loan you money – or will only loan under stricter conditions. However, following a few straightforward steps and making realistic adjustments to the way you spend will show that you’ve learned from past mistakes and help regain their confidence. The key is proving that you’re responsible, reliable and capable of handling future financial commitments.
Check your credit score
Start by finding out your credit score if you don’t know it already. This gives you an idea of your current borrowing position and will help you track improvements over time. Credit scores provide a quick insight into your financial history and are used by lenders to assess your eligibility for loans and tailor your repayment plans. A poor score can be a significant barrier, but it can be recovered.
You can find out your credit score for free through various services. Consider getting an overview of your full credit history so you can identify lingering ‘negative marks’ that are dragging down your score – possibly without you knowing!
Resolve any outstanding debt
Lenders will want to see that you are addressing any outstanding debts before they consider offering you a new loan. Make it a priority to settle any unpaid loans and credit card balances, focusing first on clearing arrears (charges for defaulting on agreed repayments).
If you’re juggling multiple debts, you could consider consolidating them into a single, manageable payment. It’s worth speaking to lenders to discuss your options or looking into special debt management plans. This can help to reduce the overall interest rate on your debt and lessens the strain of debt management.
Remember that not all debt is equal, and sometimes it’s better to save rather than settling outstanding loans. While high-interest loans should be settled as soon as possible, fixed-term agreements such as mortgages do not need to be prioritised over other spending and saving, so long as you’re keeping up with the pre-arranged repayment plan.
Demonstrate responsible spending
Once you’ve resolved any outstanding costs and you know how much you can spend monthly while staying in the black, you’ll be able to demonstrate that you can handle money responsibly moving forward. Create a comprehensive budget tracking your outgoings against your income, ensuring you cover all monthly essentials and are prepared for larger annual payments such as insurance. You should also work towards bolstering your savings and building up an emergency fund.
For showing that you can handle borrowed money responsibly too, a credit card for bad credit is a useful tool if you cannot get approval for a standard card. Also known as ‘credit builders’, these work exactly like normal credit cards but tend to have lower limits and are available to those with low credit scores. Consistency with timely monthly payments will help to improve your score over time. Be wary of the risks of borrowing beyond your means and doing more harm than good.
Avoid high-interest loans
For quick access to cash, it can be tempting to consider high-interest loans or payday loans. However, the exorbitant interest rates on these types of loans can trap you in a cycle of debt which can harm your credit score further.
Instead of turning to high-interest lenders, consider exploring alternatives. Personal loans from banks or credit unions often have more favourable terms, and some of these institutions even offer tailored options for individuals with a poor credit history. By choosing loans with lower interest rates, you’ll find it easier to stay on top of repayments.
Seek lender feedback
Finally, if you’ve been declined for credit or loans, it’s helpful to ask the lender for feedback. Many lenders will provide insights into why your application was rejected and this can be a valuable learning opportunity. They may highlight areas where you need to improve, such as your credit score, income, or debt-to-income ratio. Understanding these factors gives you a clear direction for what needs to change before you reapply.
If you’re still facing difficulties, you could speak to your lender about your options for dealing with your debts. For example, you could try to negotiate more reasonable repayment schedules to help you stay ahead of interest charges and clear outstanding balances. Showing willing to clear your debt can be all it takes to get special arrangements that ease the pressure and provide more flexibility with finances.
