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The Causes Of Bad Credit Rating: Explained

The Causes Of Bad Credit Rating: Explained
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Almas Uddin
Almas Uddin

Founder and Mortgage Advisor

Almas Uddin27 Feb 2024

Struggling with a bad credit rating is more common than you might think. Research shows that one in five people have errors on their credit reports that could affect their scores. This article will guide you through the causes of a poor credit score and how to fix it.

Let's dive in!

Key Takeaways

  • Missing payments on loans, credit cards, or mortgages can hurt your credit score. Lenders report these missed payments to credit bureaus which makes it harder for you to borrow money in the future.
  • Declaring bankruptcy severely affects your ability to get loans and increases interest rates on future borrowing. This drastic step stays on your credit record for up to ten years.
  • Choosing the wrong credit card with high fees and interest rates can lead to trouble managing your finances. It's important to compare different cards before making a choice.
  • Getting a County Court Judgement (CCJ) against you for failing to repay what you owe will make it much more difficult to borrow money again as lenders see this as a sign of financial unreliability.
  • Paying only the minimum amount due each month means you're mostly paying off interest rather than reducing the debt, harming your credit rating over time.

Causes of Bad Credit

Understanding the reasons behind a poor credit rating is crucial for anyone looking to navigate their finances wisely. Unforeseen circumstances and simple mistakes can lead individuals down the path of financial strain, impacting their ability to borrow money efficiently.

Failing to stick to credit agreements

Failing to adhere to credit agreements is a major factor contributing to a poor credit rating. If you miss payments on loans, credit cards, or mortgages, lenders report these defaults to credit bureaus like Experian, Equifax, and TransUnion.

In times of inflation, missed or late payments negatively affect your FICO scores and show lenders that lending money to you poses a higher risk.

Every time you break the terms of your credit agreement, it doesn't just impact one loan or card; it potentially harms all areas of your financial life. Creditors view this as evidence of unreliability in managing debts, influencing not only current but also future opportunities for borrowing.

From car loans to securing lower interest rates on refinancing deals, adhering strictly to agreed repayment plans safeguards your financial reputation against damaging judgements and ensures smoother transactions with financial institutions moving forward toward declaring bankruptcy.

Declaring bankruptcy

Declaring bankruptcy is a legal process where individuals or businesses cannot repay their outstanding debts. This step often follows extensive attempts at debt consolidation, credit counseling, or exploring repayment plans like the debt avalanche method.

It allows one to undergo a financial reset, albeit with significant consequences for their credit history. Bankruptcy filings come in different forms, each with its set of procedures and impacts on one's assets and liabilities.

This action drastically affects credit scores as it signals to creditors and collection agencies that the person has defaulted on numerous accounts. Credit reporting agencies record this event, causing a severe drop in one's creditworthiness which can linger on a credit report for up to ten years.

In turn, securing future lines of credit becomes challenging; banks may hesitate before offering personal loans or opening current accounts due to perceived increased credit risk. Insurance companies might increase premiums while landlords could demand higher deposits from those who have declared bankruptcy previously.

Choosing the wrong credit card

Selecting a credit card that doesn't match your financial habits and needs can lead to trouble. Sometimes, people get lured by attractive offers from credit card companies without reading the fine print.

This mistake might result in high interest rates, steep fees, and rewards that don't align with their spending patterns. Credit cards should aid your financial management, not hinder it.

Understanding the terms of any credit agreement is crucial before making a commitment. Many individuals fail to compare annual fees, interest rates, and reward structures across different cards.

They end up locked into agreements that cost them more in the long run than they initially thought. Making an informed choice early on prevents headaches caused by unsuitable cards and keeps your credit score healthy.

County Court Judgements (CCJs)

Choosing the wrong credit card can lead to difficulties, but receiving a County Court Judgement (CCJ) takes these challenges to another level. A CCJ occurs when someone fails to repay money they owe, and a creditor takes legal action against them.

This formal decision by the court marks an individual's record significantly and negatively impacts their credit score in the United Kingdom.

Lenders view CCJs as red flags, indicating high risk. As a result, securing loans or any form of credit becomes much harder with a CCJ on your record. Not only does it affect personal finance options like secured credit cards, but it also has potential implications for insurance premiums and employment opportunities in sectors that perform background checks.

The presence of a CCJ suggests severe financial instability, which creditors and even some employers find concerning.

Only paying the minimum each month

Paying only the minimum amount on your credit card each month can lead to a poor credit score. Whether you are self-employed with bad credit or work somewhere, a habit like this means you're mainly covering the interest and barely making a dent in the principal balance.

Over time, this results in an ever-growing debt due to accumulating interest charges. Credit reference agencies see this pattern and may lower your score, interpreting it as struggling with debt management.

Furthermore, consistently opting for minimum payments signals to lenders that you might not be financially stable enough to handle larger debts or repayments efficiently. This perception affects your creditworthiness, making it harder to secure loans or favourable terms in future dealings.

As we move on, let’s discuss another common pitfall: identity theft and its implications on your credit health.

Identity theft

While making only the minimum payment each month can harm your credit score gradually, becoming a victim of identity theft can lead to immediate and severe damage. Thieves might open new credit accounts, secure loans, or rack up significant debt in your name without your knowledge.

This unchecked spending spree not only depletes your financial resources but severely impacts your credit rating as unauthorised transactions accumulate.

Criminals often use sophisticated methods to access personal information such as bank account numbers, passwords, or social security details through hacking and phishing scams. They may even go as far as impersonating legitimate institutions via emails or phone calls to trick you into revealing sensitive data.

Vigilance is key in protecting yourself against such tactics. Regularly monitoring your bank statements, credit reports, and securing personal information can help detect signs of fraud early on and prevent extensive damage to your financial health and credit standing.

No credit history

Having no credit history can be just as detrimental to your credit score in the United Kingdom as having a bad one. Lenders and credit card companies use your history to predict how you might handle your finances in the future.

Without past activities like loan repayments or credit card usage, they have nothing to base their decisions on. This scenario can make it challenging for individuals to secure loans, apply for a line of credit, or obtain certain types of financial products.

Building a solid credit history is key to overcoming this hurdle. Start by opening a checking account or applying for a secured credit card backed by an initial deposit that serves as collateral.

Making small purchases and paying them off promptly shows lenders that you're responsible with money, gradually building trust and improving your likelihood of being approved for more conventional forms of credit in the future.

Impact of Bad Credit and How to Improve

Bad credit can make securing loans and obtaining financial flexibility quite challenging, but implementing strategic steps towards improvement offers a beacon of hope for enhancing your financial outlook.

Difficulty getting loans and credit

Having a poor credit rating significantly limits access to new loans and credit facilities. Banks, building societies, and other lenders conduct rigorous credit checks before approving loan applications or issuing credit cards.

If your history shows missed payments or defaulted debts, it raises red flags for potential lenders. They may see you as a high-risk borrower and either deny your application outright or offer terms that are less favourable, such as higher interest rates.

Securing financial products like car insurance, cell phone contracts, or even renting property can also become more challenging with bad credit. Service providers often review your credit file to gauge if you're likely to keep up with payments.

A tarnished credit score might necessitate paying larger deposits or agreeing to prepaid plans to compensate for the perceived risk you pose. It's clear; maintaining a good standing on your borrowing activities is essential for accessing vital services and securing preferable lending terms in the future.

Negative effects on finances

A bad credit rating tightly grips your finances, often resulting in higher interest rates on loans and credit cards. This means each time you borrow money, you pay back more than someone with a good credit score would.

From finding bad credit mortgages to personal loans, the extra cash paid over the term can add up significantly. It's not just about paying more; access to financial products becomes limited. Banks and lenders may see you as a high-risk borrower, making it tough to get any kind of loan or even attractive credit card deals.

Struggling with bad credit also impacts other areas of your financial life. You might face higher premiums for insurance policies or require deposits for utilities and mobile phone contracts where others do not.

In extreme cases, it could influence job opportunities in sectors that check credit scores as part of the hiring process. These setbacks create a cycle that’s hard to break out of without taking deliberate steps towards improving your score.

Understanding how each decision affects your financial health is crucial in navigating this complex terrain.

Ways to rebuild credit

Rebuilding credit may seem daunting at first, yet it is entirely possible with the right steps. This journey involves consistent effort and smart financial decisions. Here are ways to steadily improve your credit score:

  1. Make payments on time: This cannot be stressed enough. Whether it's credit card debt, student loans, or utility bills, paying on time positively affects your credit scoring. Setting up direct debits can ensure you never miss a payment.
  2. Apply for a secured credit card: If getting a standard credit card proves difficult, look into secured cards. These require a deposit that usually serves as your credit limit. Using this responsibly can demonstrate to lenders that you're reliable.
  3. Ask for higher credit limits: Once you've established some history of timely payments, request an increase in your credit limit from your issuer (e.g., Barclaycard or MasterCard International). Higher limits with unchanged spending can lower your utilisation ratio, improving your score.
  4. Pay off collection accounts: Debts in collections severely harm your score. Negotiate with the collection agency to pay off these debts in full or settle for an agreed lump sum.
  5. Consider a credit-builder loan: These small loans, designed specifically for building or repairing credit, are held by the lender and released to you only after all payments have been made successfully.
  6. Monitor and dispute any inaccuracies on your report: Regularly check your report for any mistakes or unauthorised activities that could drag down your score and dispute them promptly.
  7. Limit new credit applications: Each application can temporarily lower your score due to hard inquiries on your report. Apply only when necessary.
  8. Utilise the debt snowball method: Focus on paying off smaller debts first while maintaining minimum payments on others; this strategy provides quick wins and motivates further debt reduction efforts.

Make payments on time

Making payments on time is crucial for maintaining a good credit rating. Every late payment can negatively impact your score, alerting lenders that you may be a risky borrower. This includes all types of credit agreements, from federal student loans to private student loans and even your Visa card bills.

Consistently meeting payment deadlines shows financial responsibility and reliability, qualities that lenders look for.

Establish direct debits or set reminders to ensure you never miss a due date. Missed or late payments are recorded by debt collection agencies and could lead to court judgements against you, further damaging your credit score.

An individual voluntary arrangement might seem like a way out of missed payments but remember it also impacts your record. Making punctual payments not only avoids these negative consequences but gradually improves your standing with banks and creditors, making future financial ventures more attainable.

Ask for higher credit limit

Requesting a higher credit limit can be an effective strategy to enhance your VantageScore. This action may seem counterintuitive at first, but it's all about improving the utilisation ratio, which is crucial in the calculation of your credit score.

A lower ratio indicates to lenders that you're not maxing out your available credit, showcasing responsible usage and management. Therefore, by increasing your limit but maintaining or reducing your spending, you signal financial stability and trustworthiness to potential lenders.

Contacting your credit card issuer for a limit increase involves a straightforward process. Ensure you've been using the card responsibly for some time before making the request. Demonstrating on-time payments and steady income will bolster your case.

Be mindful though; issuers might conduct a hard inquiry on your credit report to assess if you qualify for the increase, which could temporarily impact your score. However, this minor dip can often be quickly recovered through improved utilisation rates achieved by having access to more credit while cautiously managing expenditures.

Pay off collection accounts

Paying off collection accounts stands as a critical step towards rebuilding your credit score. Collection accounts occur when creditors give up on you repaying your original debt and sell it to third-party collectors.

This not only damages your credit rating but also keeps potential lenders at bay, seeing you as a high-risk borrower. Tackling these debts shows new creditors that you're taking responsibility for past financial missteps.

Make it a priority to negotiate with collection agencies. Often, they may accept less than the amount owed to settle the account since they bought the debt for pennies on the dollar from the original creditor.

Securing such an agreement can significantly reduce what you need to pay while simultaneously clearing negative marks from your credit report. Actively engaging in settling these accounts signals towards member FDIC institutions and borrowers alike that you are committed to resolving past financial issues, paving the way for improved VantageScore ratings and opening doors to future lending opportunities without the shadow of defaults or bankruptcies looming over your finances.

Apply for credit builder loans or secured credit cards

After settling collection accounts, taking the next step towards rebuilding credit is crucial. Credit builder loans or secured credit cards offer a solid foundation for this journey.

These financial tools work by requiring a security deposit upfront, which essentially becomes your credit limit or loan guarantee. This setup minimises risk for the lender but keeps you accountable as you borrow against your own money and pay it back over time.

Secured credit cards function similarly to regular debit cards but with one key difference: they report to major credit bureaus. Regular use of these cards for purchases, followed by prompt full payments, gradually improves your vantagescore.

On the other hand, credit builder loans hold the borrowed amount in an account until you've paid off the loan, helping build savings while boosting your credit score through disciplined repayments.

Both options are designed to create a responsible borrowing pattern that can mend a bad credit rating effectively.

Remember bad credit is not the end of the world

Securing a credit builder loan or opting for a secured credit card are just initial steps towards mending your financial reputation. Facing bad credit can seem like an insurmountable hill, yet it's crucial to grasp that this situation doesn't spell disaster for your financial future.

With the right approach, turning around a poor credit rating is entirely possible.

Engaging in consistent, responsible habits such as clearing debts on time and keeping track of your expenditures will gradually repair your credit score. Initiatives like regularly checking your credit report for errors and disputing any inaccuracies play a fundamental role in this process.

Certain circumstances, including chapter 13 bankruptcy or foreclosures, may heavily impact your score but don't lock you out of recovery opportunities forever. Hence, adopting proactive measures today sets the groundwork for a more secure financial status tomorrow.


Understanding why bad credit ratings occur is crucial for everyone managing their finances. Mistakes such as failing to meet credit agreements or falling victim to identity theft play significant roles.

However, practical steps like making timely payments and opting for secured credit cards can pave the way towards recovery. It's important to remember that a poor credit history isn't permanent; with the right strategies, improvement is always within reach.

Taking control of one’s financial journey begins with acknowledging issues and actively seeking solutions.


1. What leads to a bad credit rating?

A bad credit rating often results from missing payments, defaulting on loans, incurring overdrafts, and facing Chapter 7 bankruptcy. These actions signal financial instability to creditors.

2. How does defaulting on payments affect my credit score?

Defaulting signifies failure to meet the legal obligations of a loan agreement. This negative mark can significantly decrease your VantageScore because it shows lenders you might not repay borrowed money.

3. Can using my overdraft harm my credit rating?

Regularly dipping into your overdraft could indicate poor financial management to lenders, potentially harming your credit score if it suggests you're struggling to manage current debts.

4. Does filing for Chapter 7 bankruptcy impact my credit score long-term?

Yes, filing for Chapter 7 bankruptcy can have a lasting impact on your credit score, making it harder and more expensive to borrow money in the future due to perceived higher risk by lenders.

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FCA disclaimer

The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature.

We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.