What are your finance options if you have a poor credit history?

Serious woman using laptop checking email news online sitting on sofa

We get it – nobody’s perfect. But if you’ve had difficulties keeping track of your finances in the past, it can affect your chances of being accepted for loans, credit cards or mortgages in the future. So, what can you do about it? Well, there are a few options you can look at which might give you access to the money you need. To help you make a more informed decision when choosing finance, here are your potential finance options if you have a poor credit history.

Homeowner loans

As you can probably guess, homeowner loans are only an option if you own your own property. You might have also heard them called a secured loan or a second charge mortgage. You don’t have to remortgage to take out a homeowner loan, it’s just a second charge that sits behind your first mortgage, if you have one.

What are the benefits?

If you have enough equity in your home, you might be able to apply for a homeowner loan even if your credit score is less than perfect. Homeowner loans also often come with longer repayment terms which could reduce your monthly repayments.

Another benefit of a homeowner loan is that you can usually use it to borrow a larger amount of money than with a personal loan. On top of that, because a homeowner loan is a type of mortgage, a qualified advisor can help guide you on which homeowner loan might be best for you.

What should I be aware of?

A homeowner loan is a loan that’s secured against your property. This means that if you fail to keep up the repayments on your loan, your home could be repossessed to recover the debt.

It’s also important to note that while longer repayment terms can reduce your monthly repayments, it’ll mean you pay back more in interest overall. Depending on your lender, there could also be a charge if you want to pay back your loan early, so it’s best to make sure you’re aware of all the terms of your loan before you apply.

Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.

Guarantor loans

So, what options are there if you don’t own your own home? Well, if you have a limited or poor credit history, you might find your only loan offers are guarantor loans.

A guarantor loan is a loan where another person takes on the responsibility of paying the debt owed if you can’t keep the repayments. Your guarantor can be a partner who you’re not linked to financially, a friend or family member.

What are the benefits?

If you’ve struggled with your finances in the past and your financial health has now improved, a guarantor loan could allow you to access the finance you need while providing more security for the lender.

What’s more, you don’t necessarily have to stick with your guarantor loan for its entire term. Making the repayments on your guarantor loan could improve your credit score which, in turn, could make you eligible for a personal debt consolidation loan. So, if there are no early repayment fees on your current loan, it could be worth checking to see if you’re eligible for a better rate further down the line.

If you are thinking of consolidating existing borrowing you should be aware that you may be extending the term of the debt and increasing the total amount you repay.

What should I be aware of?

If you can’t keep up the repayments on your loan, your guarantor will have to foot the bill. It’s therefore essential that they fully understand the financial agreement they’re entering into. Also, if you do default on repayments, it will harm both your credit scores. Guarantors usually need to be:

  • Over 21 years old
  • Have a good credit history
  • Have a UK bank account

Joint applications

Sometimes, one of the simplest ways to strengthen your loan application is to make a joint loan application with a spouse or partner. A joint loan application will mean that both people on the application are responsible for the debt owed. You can make joint loan applications for homeowner loans.

What are the benefits?

If you have a poor credit history or your affordability is low, a joint application can make you a more attractive prospect for a lender. This is because when you combine your incomes, the lender can see you have more capability to repay the loan. Because of this, making a joint application could make you eligible for a higher loan amount or a lower APR.

What should I be aware of?

If the other person in your joint loan application becomes unable to make the loan repayments, you’ll then be solely responsible for repaying the debt. Also, if you are unable to pay back your loan, both your credit scores will be affected.

Credit builder credit cards 

A credit builder card is a type of credit card that you can use to build or rebuild your credit score. When used little and often and repaid in full each month, they can slowly but surely improve your credit profile. 

What are the benefits?

Credit builder cards are usually available to those with thin credit files or low credit scores. This means that you’re more likely to be eligible for this type of credit card. 

When used regularly to pay for small amounts and repaid in full at the end of the month, over time your credit score can improve. This means that after a while, you’re more likely to be eligible for other types of finance, such as loans, credit cards and mortgages, and be offered lower APRs on finance products. 

You are also only charged interest on credit cards if you don’t repay what you owe in full each month. This means you can borrow up to your card’s credit limit without having to pay interest if you clear the debt each month when the repayment is due. 

What should I be aware of?

If you don’t make at least the minimum monthly repayment on your credit card each month, it will have a negative effect on your credit score. What’s more, if you just make the minimum monthly repayment on your credit builder card and don’t repay it in full, you’ll be charged interest on the remaining balance. Interest rates on credit builder cards can be high, meaning debt can build up quickly if left unpaid. That’s why it’s important you don’t borrow more than you can afford to pay back.

Credit cards also come with credit limits which are determined based on your credit history and personal circumstances. This means you may not be offered the card’s maximum credit limit and you can’t borrow as much as you expected. 

Finally, to really reap the benefits of using a credit builder card to improve your credit score, then you’ll want to keep your credit utilisation below 30%. To find out more about this, check out our guide to credit utilisation

Improving your credit history

If none of your available finance options are right for you, then there are things you can do to improve your credit history and financial health. For more information on how improve your eligibility for loans and credit cards in the future, take a look at our guide to boosting your score.

Find out what’s holding you back

Our completely free-to-use tool myfreedom can provide you with personalised insights into what’s affecting your financial health. When you sign up, you’ll be given the option to set up your Fusion Score. This combines your credit data with your bank data to give you a more complete view of your finances. It requires you to link to your bank safely and securely via Open Banking. 

Once set up, you’ll be given a score and insights into what you’re doing well and what’s holding you back from accessing credit. You can also check your eligibility for finance using your Fusion Score. This can sometimes unlock new finance options that were previously out of reach. 

Want to get started? Sign up to myfreedom for free now. This won’t affect your traditional credit score in any way. 

Want to stay up to date with our latest hints and tips on how to improve your financial health? Follow us on FacebookTwitter and Instagram.

Please note: If you’ve struggled to manage your money in the past, please think carefully before taking on anymore debt. Make sure you can afford your repayments before you apply.