The financial history of any consumer dictates something known as a credit score. A credit score is used by lenders to decide whether a consumer is a ‘high-risk’ or a ‘low risk’ borrower. This, in turn, affects the borrower’s potential to receive good or bad rates of interest on things such as credit cards, loans and mortgages. Those who have a poor credit rating are unfortunately more likely o be charged high rates of interest. Conversely, a better credit rating is likely to lead to lower interest rates.

Credit ratings reflect a consumer’s history of making repayments on a range of financial commitments such as mortgage fees and credit payments. As a borrower struggles with escalating debt and become less able to make repayments their credit score is likely to suffer accordingly. Thus the spiral of debt becomes hard to escape.

It is possible to improve a bad credit score with canny financial planning, the aim being to honor all outstanding debs. If their credit rating is improved the borrower represents less of a risk to lenders, meaning that their potential for lower-interest borrowing rates is increased. Many homeowners use the equity in their houses to consolidate and pay off their debts, thus improving their credit score and, with a bit of luck, improving their financial prospects. This is acheived by taking out either a secured or unsecured loan.

A secured loan is directly related to a consumer’s home. The loan is ’secured’ against the borrowers home so that, if the borrower becomes unable to pay back the loan, the house can be forcibly sold and the lender can reclaim the loan from the price that the house is sold for.

Because these loans are secured they will mostly be cheaper to manage. It is also possible to borrow larger amounts if your house is being used as collateral as well as the possibility of borrowing over an extended period (Secured Loans from Asda Finance for instance can be stretched over 240 months at an APR of 7.6% meaning you’d pay £795.76 a month – £191,277.40 in total – on a £100,000 loan). However much the interest rates that accompany secured loans are often temptingly low borrowers should balance this against the risk of home repossession.

Unsecured loans work in the opposite way. Because the lender cannot secure the loan against a borrower’s home, the risk factor for them is increased. Consequently, lenders will inevitably offer considerably higher interest rates, the length of the loan is likely to be limited to a shorter term and less money made available. There is also a minimal risk that the house can be repossessed in extreme circumstances, although, statistically, this is a rarity.

Anyone thinking about a loan should try a loans calculator like the one on the Alliance and Leicester loans website; most major loan providers will have something similar. These calculators should help you to work out how much you can actually afford to borrow and what sort of repayment arrangement would best suit your situation. Before deciding on either of these paths it is worth contacting a Debt Counseling Service. If you’re struggling with debts these services offer invaluable free advice and try to manage the situation so that someone in debt and/or with a poor credit history can try and consolidate their debts without risking their home.

Don’t hesitate to scout around for a better deal if tour credit card debt is getting out of hand. Make it a priority to find good balance transfer rates – there are currently plenty of 0% balance transfer credit cards on the market – the RBS credit card offers a particularly good deal with 0% on balance transfers for 13 months, a 2% balance transfer fee and 0% on purchases for 3 months. To keep up with the best offers it’s a good idea to check out one of the many credit card comparison sites like the Motley Fool credit cards centre or uSwitch.



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