Personal Debt Consolidation

Bad Credit History

It is a fact of modern life that most of us spend our adult years in debt. It may be consumer debt in the form of credit card debt, or a home loan in the shape of a mortgage. Perhaps you took out a personal loan to get some repairs done on your house, or borrowed a little bit extra to enjoy a nice overseas holiday. Either way, it is all debt, and for some of us, it isn't really a problem – we factor our credit repayments into our finances and slowly the loans shrink and the credit debt is erased.

But not for all of us. Sometimes on applying for a small loan or a new credit card you hit a problem. Your application for a car loan is turned down or your request for interest free credit on a new lounge suite is rejected. When you try to find out why, all you are told is that you have a bad credit rating and so can't be given the funds. What on earth does that mean and how did it happen to you?

How a bad credit rating works

You may not realize it, but every time you apply for credit – be it a direct loan or filling out the form for a store charge card – you are signing a contract. Under the terms of the contract, you are agreeing to make certain credit repayments at regular time intervals, usually once a month. The credit contract makes everything clear and open for both the lender (the bank, retailer etc) and the borrower (you). Everything is fine as long as you keep to the agreement set out in the contract. However, if you begin to slip up on repayments and start paying them late, or not at all, it will only be a matter of time before your credit rating is affected.

We live in the computer age, where information on everything (and everyone) is only a quick search and click away. There are numerous companies who make a very nice income from tracking consumers and borrowers, monitoring their financial behaviour and then selling that data on to lenders like credit card companies and banks. If you start to default on your personal loan repayments or fail to find the money for your mortgage on time, someone, somewhere, will notice and you will be given a bad credit rating. As soon as this happens, you will find you are considered a lending risk and it'll become difficult to find a regular credit provider who will lend you money.

Clearly, if a bank grants you a personal loan and you start to have trouble repaying that loan, it makes sense for the bank to try and work something out with you as quickly as possible. Usually you will have a grace period where the lender will try to contact you, find out why you are defaulting on your credit agreement and attempt sort out your money problems with you. After all, the lender wants their money back. However, consistently failing to cover debts will result in you being given a bad credit rating.

Can I erase a bad credit history?

The simple answer is Yes. You can. But it takes time. Having a bad credit rating will not stay with you forever. Usually payment defaults are removed from your record every five years. However, it is wise to be cautious. Some people think that suddenly getting their finances in order and paying off their outstanding debts before they are due will in some way act as credit repair and wipe clean their bad credit history. Sadly, this isn't so. Even if you clear your debt, the next financial institution or company that you approach for a loan of some kind will still be able to access your credit record and see your previous payment problems.

It may seem obvious, but the best financial advice so to avoid getting a bad credit history in the first place. Only take on a personal loan or a larger mortgage if your budget allows for it and don't spend more on your credit card and charge cards than you can afford. Unfortunately, people' circumstances occasionally change for the worse, so if you can see financial worries looming, take action fast – talk to your lenders and creditors, explain the situation and see if you can come to a new arrangement together. Whatever you do, don't wait until you start to miss debt repayments or you'll find yourself saddled with a bad credit history.