If you need to get a loan with a bad credit, you may be feeling discouraged. Having bad credit or credit reports with negative marks is not uncommon. About 10% people has a poor credit score and 25% of people have one or more accounts with a collection agency, another factor that could influence credit scores.
Your credit history is your history of how well you use and pay your credit accounts. If having good credit makes it easier to get loans at good interest rates, having bad credit can have the opposite effect. So, what should you do if you want to get a bad credit loan?
Before resorting to expensive forms of loans, such as payday loans, let's look at some things to know about applying for loans for people who have bad credit.
1. What exactly is bad credit?
Each company generates credit scores based on their own credit scoring models. People with credit scores in the fair to poor range may have trouble getting approved for some types of loans. People can have bad credit for many different reasons. For example, if payments are missed, credit card limits are exceeded, or there are negative marks on credit reports, such as bankruptcy or foreclosure, credit scores can drop.
2. Credit scores: Your credit scores
Let's use a comparison to help you understand how your credit scores work and how to read your credit reports. In school, you probably studied different subjects such as history, mathematics, economics, and English. You received individual grades for each assignment and a grade for overall performance at the end of the course. At the end of the semester, you received a single grade based on all the work you did in all your classes. That's the idea behind your credit reports and credit scores.
Your credit reports contain a list of the money you owe, the details of how you owe the money, and your payment history as agreed. Credit scores, on the other hand, are more like the general average. These are calculated based on the information in your credit reports and help lenders understand how well you have managed credit in the past.
When people refer to “credit” as a whole, they are usually referring to both your credit reports and your credit scores. This is because lenders generally look at both when deciding whether to approve you for a loan. Lenders often first look at your credit scores as a simple snapshot of your lending habits.
3. Who gives loans to people with bad credit?
Lenders may have their own credit score limits. If your score is below this threshold, you are less likely to be approved for a loan. But if your score is above that mark, the lender is more likely to open your credit reports to see your credit history. The lender may consider other things, such as your debt-to-income ratio, when deciding whether to offer you a loan and at what interest rate (here 's how to calculate your debt-to-income ratio).
Each lender may have different score requirements for each of the financial products they offer. For example, to get a mortgage with a lower down payment requirement, you'll need a high credit score. For their part, financial institutions, such as banks or credit unions, may require a high credit score to obtain a conventional mortgage.
Getting a personal loan with a low credit score can be difficult or expensive. But some alternative lenders, like payday lenders, may not consider your credit scores at all, but may charge very high interest rates and fees.
4. Can I apply for a loan even if I have bad credit?
You may think that low credit scores mean your only option is to use an alternative type of loan, such as payday loans or car title loans. These short-term loans typically don't require a credit check, which can make them seem tempting if you think you won't be able to qualify for a traditional personal loan or credit card.
But these types of loans can be extremely expensive in the long run, as they can equate to APRs, or an effective annual percentage rate, of around 400%. Compare that to a typical credit card, which can have an APR of around 30% at the higher end of the scale.
Instead, a better option may be to look for lenders who work with people with bad credit. Just make sure the loan amount fits your budget and read the terms of the loan, so you don't get caught by surprise fees, such as origination fees.
And if you can, try to save for big purchases and emergencies before they happen. That way, you won't have to worry about going into debt until you absolutely must, and you can focus on improving your credit.
5. How to improve your credit score?
An obvious way to increase your credit score is to simply pay off your debt. For now, it is not possible? Here's an interesting technicality: ask credit card companies to increase your credit limit. This improves your debt-to-credit ratio, which compares how much you owe versus how much you can borrow.
If you often fall behind on payments, now is the time to change. You yourself have the power to improve your credit score. Commit to always pay your bills on time; Consider signing up for automatic payments to ensure they get done.
6. Do you have bad credit? Don't feel trapped.
The first thing to know if you have bad credit is that your situation does not have to be permanent. Most negative marks, such as late payments, foreclosures, and even bankruptcies, will disappear from your reports after seven to ten years. This means that even if you file for bankruptcy, it is still possible to work on improving your credit. Here are some steps you can take to achieve that goal.
First, check your credit reports. Finding errors and successfully disputing them to have them removed from your credit reports is one easy thing you can do to improve your credit.
7. How to dispute an error on your credit report
Next, learn about the factors used to calculate your credit scores. By working to improve those factors, your overall credit health can improve, including both your credit history and your credit scores. For example, making your payments on time and paying down your debt (especially credit card debt) can go a long way toward improving your credit.
Trying to get a bad credit loan can be frustrating. But it may be possible to find reputable lenders who will work with you, even if you have bad credit.
In fact, taking a personal loan when you have bad credit and making payments on time can help improve your credit scores. That way, if you ever need to make a major purchase, like a house, you can have better credit.