This blog is part of the blog series “How to fix your credit”
2- Consider debt consolidation
3- Learn how to get…
-…a credit card with bad credit
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How to Get a Good Loan with Bad Credit
Almost all of us go through a bad patch sometimes which can lead us into financial trouble. It could be the result of a bad financial decision, or something that was never really in our control. However, credit reporting agencies only look at hard facts and your credit scores can therefore, take a hit.
Although the best financial advice in such situations is to try and improve your credit score, that is still a long term process. This does not mean that you have no options open to you to borrow money in the short term. So read on to find out how you can borrow money on good terms, even with bad credit!
What is a credit report and “good credit”?
Before we get into the details, let us first have a look at what a credit report really is and what having “good credit” really means. Your credit report is a collection of financial information that has been collected on you throughout your lifetime. It consists of details about all your previous loans and credit cards, details like current outstanding, total amount sanctioned, any delays in payments or defaults etc. This information is provided by banks and other financial institutions to private agencies like Equifax, Experian, and TransUnion which are dedicated to collecting and storing this information.
Most often your score is displayed as a number, with higher numbers generally being better. Here is a chart showing FICO score ranges and what they mean:
| FICO Score Range | Comments |
|---|---|
| 800 | Exceptional credit no concerns in terms of credit score. |
| 740 to 799 | Again very good credit and no concerns. |
| 670 to 739 | This is an acceptable range and also where most consumers generally end up. You should not have any issues while applying for loans or credit cards. |
| 580 to 669 | This is where things start to get a bit tricky. A score in this range normally indicates some historical or ongoing delays in payments. Banks might require additional collateral from borrowers falling in this range |
| Below 579 | A score in this range indicates a serious credit issue like a long delayed payment or an outright default. Banks would usually demand substantial collateral or some other form of guarantee to lend. |
Note: These ranges are based on what Experian recommends. Banks usually have their own ranges but they are very close to what has been mentioned here.
Note 2: Banks do consider things other than your credit score as well when deciding to lend. Things like income, job stability, obligation to dependents etc. might also be considered.
So why is all this done? Well, banks want to share information about good customers amongst themselves. And good customers are the ones making their payments on time. This way, banks don’t have to spend too much time on assessing your loan application and can simply have a look at your credit report and take a call.
The most essential things to know about your credit report
Before you borrow, you need to know your rights as consumers of financial products and services. Keep the following in mind whenever you apply for a loan:
First of all, you are entitled to get one free credit report every 12 months from each of the three credit reporting agencies (Equifax, Experian, and TransUnion). You can visit this official website to claim your free copy.
Secondly, you can reach out to the Consumer Financial Protection Bureau (CFPB), which is a federal agency protecting the rights of consumers of financial products in the United States, in case of any issues related to your credit report.
Thirdly, in case you find any issues in your report, like incorrect or outdated information for example, you can request the respective bank or financial institution to correct/ update it and also send the request to the credit reporting agency. You might have to include some proof (of repayment) in cases where it’s applicable. As always, if you do not get an adequate response, you can file an official complaint with the CFPB.
So, how can I get a good loan with a bad credit history?
Here are some things you can try in case you have a less than stellar credit score. Of course, this assumes that you have tried getting financial assistance from friends and family who can offer you any needed support.
Get a co-signer or guarantor
A co-signer is someone who legally accepts to sign off on your loan as a sort of guarantor. Essentially, this means that if you are unable to pay off your loan, your co-signer would be liable to pay it. Because of this it is essential that your co-signer trusts you enough to take on this responsibility. It could be a relative, your employer, a parent, anyone with a good credit score who can co sign your loan. The bank or financial institution making the loan then draws comfort from the good credit history of your co-signer. This can significantly improve your chances of getting a loan, depending on how good the credit history of your co-signer is. Bear in mind, however, that if you delay payments on a co-signed loan, the credit history of your co-signer will also be affected in addition to yours.
Peer to Peer lending
This is a rather novel concept which has been gaining popularity of late. A peer to peer lending platform is essentially a website which brings together borrowers and lenders in once place. As a borrower, you can post your request for a loan, along with some details about you like name, address, annual income and so on. You also have to post a reason for the loan which can be anything from home improvement, credit card refinancing, starting a business or even taking a vacation!
Once your information has been posted, potential lenders (who are individuals who have some extra money to invest) can look at the various requests and find one that meets their criteria. Although, peer to peer lending platforms will check your credit score and display it to lenders, you still have a much better chance of getting a loan here than from a traditional bank. Why? Because banks have automated criteria for accepting or rejecting loans and they cannot deviate from it. On peer to peer lending platforms, it is up to the individual lender to make a decision and if he believes that you can repay, he can invest in you with confidence.
Some example of reputable peer to peer lending sites: Prosper.com, LendingClub.com, FundingCircle.com. If your credit score is a bit on the lower side, PeerForm.com and OneMainFinancial.com might be better options. Finally, you might want to go to BadCreditLoans.com in case all other options fail. Be warned however, that the rate of interest and fees on this last platform may be prohibitively high.
Get a Home equity line of credit
A Home Equity Line of Credit (known as HELOC) is a like a second mortgage on your house. HELOC loans offer a credit line whereby the borrower can draw down on the loan as and when required. The total amount of the loan is determined the value of the property minus any existing mortgage value.
HELOC is a good way for those who own their own homes to get a line of credit which they can use in times of urgency. It is important to note, however, that since you are providing your house as collateral, it is essential that you remain on top of your payments. Such type of a loan is suited for those who have steady income but want to make a big and important purchase/ expense in the immediate future. It is also essential to note that in most cases, interest payments on HELOC are tax deductible as well.
Become a member in your local Credit Union
Credit unions bring banking down to the community level. A credit union is a financial co-operative and a non-profit organization which exists to improve the financial well being of it’s members. Credit unions are often created and owned by members who live in a general area or share some other common connection. Being non-profit, you can expect to get a better rate from a credit union, and also a friendlier welcome amongst your peers, when compared to a bank.
There is bound to be a credit union in your region and there are many which focus specifically on the Hispanic community as well. Like these:
You can search for such credit unions in your area of residence or work. There are also certain credit unions which help people in particular professions and you might qualify to join one of those as well.
What to avoid
Payday loans should be avoided like the plague. Their high interest rates will make you suffer more than you gain, almost all of the time.
How to improve your credit score
Let’s be honest, all of these options are nice to have, especially during emergencies, but in the longer term you should aim to improve your credit score. Yes, it is easier said than done but even a small increase can help a lot. So here are some tips to help you improve your credit score.
Track your bigger repayments. When calculating your credit scores, agencies give around 35% weightage to your repayment history. Any delay in loan repayments causes the score to fall. Keep in mind that missing larger payments like mortgages has a much bigger impact than missing a smaller credit card payment. Also, the longer the delay, the more impact it is going to have. Finally, if you miss a payment once in awhile, it might be ignored but if you do it with a high frequency, it will cripple your credit scores.
Don’t borrow too much. About 30% of the weightage when calculating your credit scores is given to your credit utilization as a percentage of your credit limit. Credit reporting agencies don’t like it when you max out your credit card or borrow all the way up to the available credit limit. In fact, it might be ideal to stay below 20% utilization on your credit cards and other loans.
The length of your credit history. Almost 15% of the weightage when calculating your credit scores is given to the length of your credit history. So, someone with a 15 year loan with a regular repayment history will have a better score than someone with only 3 years of regular repayment history. This might not be necessarily fair, especially to younger people who are just joining the workforce, but it is a way to reward those people who have been regular in their payments for most of their lives.
Recent activity. About 10% weight is applied to something called “credit hunger”. What this means is that if you have too many new loans or even too many new loan applications, the credit agencies can sense that you are desperately trying to look for new credit and somehow this makes you slightly riskier than if you apply for fewer loans.
The balance weightage to calculate your score comes from the credit mix - which means having different types of loans is better than having just 20 credit cards only.
Borrow Smart, Spend Wisely
You credit score is something that you should cherish and try to improve throughout your life. Yes, sometimes it is not in your control and things do not always go as planned, but with time, your credit score, like everything else in life, will heal.