Finance: Escape a bad credit history

Are bad debts darkening your financial future? Now there's an alternative, says Stephen Pritchard

Consumer debt in the UK is at record levels, and rising rapidly. Collectively, Britons owe more than £1.2 trillion (£1,200bn) on mortgages, personal loans and credit cards. This is 20 per cent higher than in 2004.

At the same time, more individuals are facing court action to recover money when they cannot pay their debts. According to Registry Trust, the non-profit body that monitors county court judgements (CCJs), these rose last year by seven per cent, to 570,000.

CCJs stay on a person's credit history for six years, and a lender will take CCJs into account when deciding whether to grant a loan. In some cases, mortgage companies will not take on applicants with any CCJs against them. Some lenders will consider cases where judgements were a few years ago, or where the sums involved were small. Other lenders will agree a mortgage, but only at more expensive rates.

According to Louise Cuming, head of mortgages at Moneysupermarket.com, some banks and building societies will approach bad debt on a case-by-case basis. Some lenders are prepared to overlook CCJs, and even mortgage arrears, if they relate to a past relationship that is now over, or even past periods of unemployment.

In such cases, how the homebuyer has managed his or her borrowing since the problem is critical. "If, for example, someone had five CCJs and quite a few missed payments, but it was historic and there were matrimonial reasons for it, and they had paid their mortgage in an exemplary fashion for three years, they may well be prepared to lend on a prime [mainstream] mortgage rate," says Cuming.

The problem for home buyers with past credit problems is how to build up a solid track record of repayments if they are unable to obtain a mortgage or other credit. The conventional option is to borrow from a specialist "sub prime" or credit-impared lender, and then switch to a regular company after a few years.

Sub-prime lenders will take on home buyers who have had arrears, or even been repossessed, but for much higher interest rates - as much as 11.6 per cent, according to Moneysupermarket. Sub-prime lenders might also demand that the home buyer is tied to the loan for a number of years, even on a variable rate.

However, a handful of lenders are now offering an alternative, known as a "credit repair" mortgage. These mortgages work by allowing a home buyer to borrow at a premium, credit-impaired rate, but then switch to a standard rate without remortgaging after a blemish-free period of between one and three years.

Such deals are on offer from lenders including the Scarborough and Chelsea building societies and Accord, the specialist lending arm of Yorkshire Building Society. Accord requires borrowers to maintain repayments without problems for 12 months, while the other lenders look for three years of steady repayments.

Maintaining a healthy payment history is certainly worthwhile. Although some mainstream lenders will allow a few, small credit problems, such as an occasional missed payment or even a CCJ for a small sum, for borrowers who are forced to turn to the sub-prime market mortgages are significantly more expensive. The greater and more recent the debts, the more expensive the credit.

Accord, along with a number of other lenders that operate credit repair mortgages, offers stepped interest rates based on credit risk. Someone with small credit problems might be offered a loan, based on current rates, of 5.69 per cent. A borrower with a number of unsatisfied CCJs is likely to be asked to pay interest at the upper end of the scale, at 8.29 per cent.

After a year, however, borrowers can switch to any Yorkshire Building Society standard mortgage: the lender is currently offering a tracker mortgage at 4.45 per cent. Even if it costs a borrower more in the short term to repair their credit history - in the form of a higher mortgage rate - the long-term savings mean it can be worth it.

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Digital Optimisation Executive - Marketing

    £30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

    Recruitment Genius: Financial Reporting Manager

    £70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

    Recruitment Genius: Payments Operations Assistant

    £23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

    Recruitment Genius: Telephone Debt Negotiator

    £13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

    Day In a Page

    Syria civil war: Meet the military commander who says his soldiers will not rest until every inch of their war torn country is free of Islamist 'terrorists'

    ‘We won’t stop until Syria is back to normal’

    Near the front lines with Islamist-controlled towns where Assad’s troops were besieged just last month, Robert Fisk meets a commander confidently preparing his soldiers for battle
    The inside story of how Bill Clinton built a $2bn global foundation may undermine Hillary's chances

    The inside story of how Bill Clinton built a $2bn global foundation...

    ... and how it may undermine Hillary's chances in 2016
    12 best olive oils

    Extra-virgin, cold-press, early-harvest, ultra-premium: 12 best olive oils

    Choosing an olive oil is a surprising minefield. Save yourself the hassle with our handy guide
    Rafa Benitez Real Madrid unveiling: New manager full of emotion at Bernabeu homecoming

    Benitez full of emotion at Bernabeu homecoming

    There were tears in the former Liverpool manager’s eyes as he was unveiled as Real Madrid coach. But the Spaniard knows he must make tough decisions if he is to succeed
    Sepp Blatter resignation: The beginning of Fifa's long road to reform?

    Does Blatter's departure mean Fifa will automatically clean up its act?

    Don't bet on it, says Tom Peck
    Charles Kennedy: The baby of the House who grew into a Lib Dem giant

    The baby of the House who grew into a Lib Dem giant

    Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
    Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

    The harrowing testament of a five-year-old victim of Syria's endless civil war

    Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
    The future of songwriting: How streaming is changing everything we know about making music

    The future of songwriting

    How streaming is changing everything we know about making music
    William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

    Recognition at long last

    Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
    Beating obesity: The new pacemaker which helps over-eaters

    Beating obesity

    The new pacemaker which helps over-eaters
    9 best women's festival waterproofs

    Ready for rain: 9 best women's festival waterproofs

    These are the macs to keep your denim dry and your hair frizz-free(ish)
    Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

    Wiggins worried

    Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
    Liverpool close in on Milner signing

    Liverpool close in on Milner signing

    Reds baulk at Christian Benteke £32.5m release clause
    On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

    On your feet!

    Spending half the day standing 'reduces risk of heart attacks and cancer'
    With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

    The big NHS question

    Why are there so few new GPs when so many want to study medicine?