Having bad credit will not just make it hard for you to borrow money, but a low credit score can also prevent you from getting a good job, or renting out a place to live. Before we go to bad loan credits, let’s start with understanding the basics of credit.
Financial institutions will need to check your background whenever you need to borrow money or buy a property. They will also need to know if you have the ability to pay them back, and there needs to be a standard to measure that instead of saying that you promise to pay. This is where your (good or bad) credit score comes in. It’s a scoring system that quantifies your risk. It ranges between 300 to 850, and the higher your score, the better your credit is. They look at the following factors:
- PAYMENT HISTORY. This makes up 35% of your score and looks at how you have paid off past loans, and if you did everything on time.
- AMOUNTS OWED. This is 30% of your score, and they look at how much you currently owe, to see if you can still handle another loan.
- LENGTH OF CREDIT HISTORY. 15% of your score is about your experience in managing debt. If they see a long record of responsible borrowing, then you will get a better score.
- TYPES OF CREDIT USED. This makes up 10% of your credit score and looks at what type of debt you have, such as home and car loans, credit cards and more.
- NEW CREDIT. This is the final 10% of your score and looks at how many loans you applied for in a short period. Applying for a lot of loans can bring down your credit score.
Now when we are starting out, we get loans to help us buy a house, or a car, or get a degree. Any delinquent payments or problems paying off credit cards can bring down your score. It will be harder for you to get mortgages if your scores are low, and you can also get bad deals, like higher interest rates, since you are a high-risk borrower. If you are interested in renting, a potential landlord can check your credit score and see if you are a responsible renter. And when you are looking for a job, employers will also check your score. They cannot deny you a job because of your score, but they still look at it. You may also have a hard time buying insurance if you have bad credit. You can also be asked for larger deposit amounts for utilities.
How do you get a loan with your bad credit?
To be able to get a loan, you need to do something to improve your credit score. While it might take time, you have these options to help tide you over:
- CREDIT UNIONS. Credit unions are non-profits that are owned by their members. Earnings are passed along to their members through lower fees. When applying for a loan from them, they tend to look at your overall situation, and not just your credit score.
- FAMILY AND FRIENDS. You might get friendlier terms from family and close friends. Just make sure you pay them back and on time.
- PEER TO PEER LENDERS. There are various networks such as Prosper and Lending Club, where you can borrow money through these platforms where people can bid for your loans with different interest rates.
- ONLINE. There are some resources online that can grant you loans by filing online.
How do you rebuild yourself with bad credit?
Your credit score adapts based on any changes to your credit. So if you want to improve your credit, you can start simple and work slowly to rebuild your credit score. Here are a few things you can do that can help:
- FIX YOUR CREDIT CARD BALANCE. Paying off your credit card debt first has a faster effect in improving your credit score as compared to bigger loans, so if you need immediate results, start with this.
- USE THE CREDIT CARDS LESS. Since you are still paying off your credit card debt, don’t add to it. You should try for a 10% utilization rate for best results.
- LOAN CONSOLIDATION. If you have multiple loans and the monthly payments for these are hurting your expenses, consolidate your loans into one. If you also have credit cards, try to consolidate them into one card and pay if off.
- PAY BILLS ON TIME. When you pay your bills also matters when it comes to your credit score. Pay your credit cards, loans, utilities, rent, and other bills promptly, or within the grace period allowed.
- CLEAN YOUR CREDIT REPORTS. You are entitled to one free credit report per year. Go through it and make sure that paid off accounts (especially delinquent ones) get wiped off from your report. While it gets removed automatically, there are times when these black spots stay in your report, and you need to be diligent in checking if everything in your report is accurate.
While you are currently down with bad credit, you can still find lenders who are willing to work with you. The rates you will get will be higher since you have low credit score, so if you need money now, then you could take it, and use the loan responsibly to help increase your score. If, however, you can still hold off, even a few months, work on paying off some of your debts and improve your credit a bit before getting a new loan.