Bad credit has a heavy stigma attached to it, and when you consider what bad credit represents, it’s not hard to understand why. Strictly speaking, someone with a bad credit rating has a history of failure to keep up with previously made credit agreements.
The direct knock-on effect of this, it’s widely believed, is that bad credit means that you will not be able to get approved for future credit from lenders because they perceive you as a risk.
This is also hugely relevant to anyone letting (or looking to rent), as the ability to make the monthly rental commitment is seen as being strongly linked to your past credit history.
What is Bad Credit and What Does it Look Like?
Whether or not you think this sounds fair will most likely depend on your own circumstances and experience with credit in general (whether it’s your own or because of someone else, i.e. a tenant). Every individual over the age of 18 will have a ‘credit score’, this score is held via the various credit agencies. The most common agencies are Experian, Equifax and Call Credit.
The score itself is a financial picture that is calculated from various different places:
- Your Credit Report – History of past credit, confirmation of your identity, electoral roll and address history.
- Past credit applications – What you’ve applied for, when and why.
- Customer records – If you’re using the same lender, they’ll use past customer information.
- Payment history – Whether you adhered to the payment schedule set by the lender(s)
So what you get is a pretty solid picture of what your score is – your life’s borrowing put into a numerical value.
Taking out long-term credit and making regular on time payments during this period typically achieves a good credit rating – another way of thinking about it being a proven good payer.
You get ‘bad credit’ by making late payments, defaulting altogether, getting County Court Judgments against you, being declared bankrupt or various other types of ‘bad behavior’.
Bad credit isn’t the end of the world, however, many believe they have worse credit than they actually do, or see failing a credit check as meaning they have bad credit – end of story.
The real picture is often more complex and there are often workarounds, which can suit everyone involved.
Landlords and Bad Credit Tenants
If you’re a prospective tenant and you’re going through a letting agent or landlord who insist on you passing a credit check before signing an agreement, any bad credit history may be a concern.
That moment where the credit check is failed will ultimately be an unpleasant one, but there are some steps you can take:
- Look at your own credit file – This is when you find out how bad, ‘bad’ really is.
- Make a case for your bad credit – Sometimes lenders will turn you down for credit based on minor issues, which some letting agents and landlords may be willing to look past. Make a case and explain what may have caused the issues.
- Offer a larger deposit – if you’re confident you can afford the rent, but you have a less favorable credit score, offer a larger deposit or look to pay more up front. This will show a willingness to rent, offset any risk and help give more faith in your financial situation.
- Get a rent reference – Are you renting already and have been for some time? If you’re able to get the landlord/letting agent to write a reference, again it may show that you can make the commitment.
- Find a guarantor – A friend or family member who is able to pass a credit check can be made a guarantor for your rental agreement, however, be aware that if you’re unable to pay, they will have to!
Finally, ask the question whether or not you have to rent. Many people with bad credit believe that they have little or no chance to get a mortgage and this is only to be expected. If however, your salary is likely to cover the mortgage repayments and you have a deposit, seek out a mortgage broker who specialises in bad credit who will be in the best position be able to approach lenders who are willing to help.
Of course, whether you’re renting or possibly looking to buy, the overriding concern is that you’re confident you can keep up with any financial commitment you undertake.
Looking to Let to Someone with Bad Credit?
Anyone looking to rent out his or her property wants a stable income, with a return on the investment they’ve made (or at least stays cost neutral). This is going to be dependent on a tenant who is able to pay the rent consistently and on time.
With this in mind, it’s no surprise that the majority of landlords and lettings agents will insist on having any prospective tenants run a credit check – so they understand how reliable (or not) they are likely to be.
Letting agents should be able to run these checks, however, you’re also able to have the National Landlords Association, Experian or similar services run tenant checks for you if you’re renting privately.
These checks vary in how rigorous they are, but typically these will look for the following:
- History of County Court Judgments, Bankruptcy or Insolvency
- Past addresses
- Registration to an electoral roll
- Affordability checks
- Income/Employment checks
With this information you can establish whether or not you believe your prospective tenant will be reliable in making the payments and make an educated decision based on this.
Most experienced lettings agents will be well positioned to help make this decision, and provide alternative options (as those mentioned above), if the checks aren’t passed. Remember, there are varying degrees of bad credit (depending on severity and time), and they are not always indicative of a “bad tenant”.
Is Bad Credit a Big Problem?
For many bad credit will feel like a big problem, it can complicate the process of letting a property simply because it can call into question the financial security of the process. But bad credit doesn’t need to stop tenants renting a property if an amicable solution can be found.
If you’re unsure, just ask – there’s a good chance it won’t be as bad as you think!
Article courtesy of Rana Miah – Just Mortgage Brokers