Will Bad Credit Ruin My Christmas? | Personal Finance Views

Monday, December 21, 2015

Will Bad Credit Ruin My Christmas?

If you've got a bad credit rating, then you may think that you are facing a bleak Christmas, particularly if you are short on money in the run up to the festive season. You’re not alone in this – there are hundreds of thousands of other people who've made mistakes in the past who are now finding out that it is going to be difficult for them to be offered loans, credit cards, mobile phone contracts and other forms of credit. Sometimes, this is through no fault of their own – they may never have been late with a repayment but might not be on the electoral roll or have never taken out credit in the past.

You may have run your financial affairs responsibly for years but something you did up to six years ago means that the major financial institutions regard you as too high a risk to lend The good news is that there are many other options for securing a loan or a credit card if you are suffering from a bad credit record. Because the major banks have failed to return lending to the levels seen before the financial crisis, the market for alternative lending is very large and many lenders are quite happy to help people who have impaired or bad credit ratings.

There is a huge array of financial products on the market for those with bad credit – many of them with reasonable interest rates, large capital sums on offer and favorable terms for repayment. And, even better, these are available quickly and can be in your bank account in time to cover all the costs of Christmas.

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If you suspect or know that your credit rating means your bank is not going to lend you money in time for the festivities, what are your alternatives?

Family or friends

This should be your first port of call at this time of year. The very high interest rates that the press made such a fuss about a year or two ago may be restricted to a few lenders, but if a member of your family or a close friend is in a position to lend you money, the chances are that you will pay less in interest than if you search for a sub-prime loan. This is because even though these lenders cater specifically for people with impaired credit ratings, they are still operating in a market that is riskier than those who only offer credit to people with excellent financial records.

Asking your parents or a friend to lend you some money might be uncomfortable, but those close to you are often only too willing to help out, particularly if you need money in a hurry – which most of us do at Christmas. It is likely that you’ll be able to come to an agreement on an affordable rate of interest and that your family member or friend will give you the right amount of time to repay the loan.

Unsecured loans

There are now thousands of lenders who will consider applications from people with bad credit records. These loans will usually have higher interest repayments than those offered to people with excellent credit records but, in most cases, they are an affordable means of raising money to fund Christmas – which, for most people, is the most expensive time of the year. Because these loans are not secured against property, you won’t be risking your home if you apply for one and because there are so many lenders, it’s a good idea to properly assess the market, comparing interest rates and repayment schedules to secure the best deal. Don’t worry if one lender rejects your application, there are many others to consider. It’s worth using the eligibility calculators which many lenders now offer – these let you see how likely it is that your application will be accepted without a search being recorded on your credit file.

Credit cards

Credit cards are the safest and easiest way to pay for Christmas presents – they offer you instant funds – which you can use at virtually every store and online retailer while protecting you should something go awry with the purchase. Unfortunately, for many people with poor credit ratings, the credit cards offered by the high street banks are either not available or come with very high interest rates. Happily there are now a variety of cards on the market designed specifically for people with bad credit ratings. These cards come with higher interest rates but as well as helping out at Christmas, can help you to reestablish a good credit record. Although they come with lower credit limits, the amounts on offer should ensure that Christmas wouldn't be such a stretch this year.

A secured loan

If you own your own home but have been unable to secure a loan from the bank, then you will find that you have many more options than somebody who rents or is in social housing.

Lenders are much more inclined to offer credit to homeowners who can put their properties up as security – which means a lower risk that the loan will not be repaid. Such secured or homeowner loans have lower interest rates and longer schedules to repay them than unsecured loans for people with bad credit. If you are looking to borrow a much more substantial sum – typically in excess of £15,000 – then a homeowner loan will give you more flexibility.

There are disadvantages compared with unsecured loans, however. Because you are putting up your home as security, you may face repossession should you fail to make your repayments regularly. If you’re considering one of these loans, make sure that you are clear about the total amount of interest that you will pay because, if you are only looking for a smaller sum, you might have to pay a much larger amount over the term of the loan than if you did by taking out a smaller, unsecured loan.

Credit unions

There has been a rapid growth in credit unions in recent years. They serve local communities and offer both savings accounts and loans. The disadvantage if you need money quickly in the run up to Christmas is that most credit unions ask new members to become savers first.

Payday loans

If it’s just a few hundred pounds that you need to get you through Christmas, a payday loan may prove to be the most affordable option despite the lurid headlines these loans attracted a few years ago. The market is now highly regulated and interest charges and the number of times that a loan can be rolled over are restricted. If you want to borrow, say, £200 for a month, you might have to repay a total of £250 meaning a real interest rate of 25% on the total loan – not the four-figure APR that is advertised.

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