A credit score of 700 or above is considered good for a scale of 300-750. However, sadly, the average credit score in the US is only 673, according to Vantage. This is why most people find it difficult to get their loan application approved.
But, do not give up just yet. It is possible to get a loan with bad credit. Let’s find out how to get a loan with bad credit score:
First of All, Find Out Your Credit Score
It is important to know your credit score so that you can fully understand where you stand financially.
This three-digit-figure will play a very important role in your loan application. If you’re not sure of your credit score, call your bank and request for a free score. You can also get one from FICO for a nominal fee.
The company issues five categories:
- Excellent: 800-850
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: 300-579
Once you know your credit score, it is time to start searching for companies that accept applicants with a lower score. Moreover, you should also take steps to improve your credit score.
How to Improve Your Credit Score
It is not very easy to improve your credit score but it’s not entirely impossible. However, it may take a while for changes to appear in your credit score.
Do not let the time lag change your plans. You must work on improving your credit score so that you can easily get your loans approved in the future.
Here are some tips:
– Pay Your Bills on Time
The best way to improve your credit score is to always pay your bills on time. When we talk about bills, we mean all kinds of bills including utility bills, credit card bills.
Most of us want to pay our bills on time but we’re either low on money or we forget due dates. This is why it may be a good idea to use a mobile app like Mint so that you never miss out on your payments.
Such apps are designed to send you timely reminders. Some apps, in fact, can even make payments on your behalf by allowing you to prepare a schedule.
Look around and pick a tool that suits your situation. However, remember that some such apps may be costly. Also, if you are low on money then look for a side gig or reduce your expenses so that you have enough money to pay your bills.
– Get Rid of Your Debt on Time
The credit utilization ratio is one of the most important factors companies consider when judging your loan application. It’s calculated by taking a total of your credit card balances and dividing the resultant amount by your credit limit.
For example, if you charge $1,500 per month and your total limit is $5,000 (for all your cards) your credit utilization ratio is 30 percent.
Lenders prefer applicants with a low credit ratios, ideally below 30 percent. The rato can be an indication of how you use your credit. A low ratio means you haven’t maxed your cards and you know how to manage money.
The best way to work on your credit utilization ratio is to keep your balances low, pay off your debt on time, and be an authorized user on someone else’s account if they’re good at using credit.
– Opt for Debt Consolidation
While the opinion on debt consolidation is divided, there’s no denying that it can be effective in increasing your credit score. However, it may not be suitable in all situations.
Debt consolidation involves taking one loan to pay off another loan. However, it may be effective only if your new loan is cheaper than your current loan.
This may sound like an odd deal on paper but if you’re smart enough, you may be able to find more affordable loans.
In addition to this, you might also have the option to renegotiate terms for your current loan. Some providers might be willing to offer you a lower rate based on your performance. So, try all the options that you have.
– Scan Your Credit Report for Errors
A number of people find small errors in their credit report that can have a huge impact on their credit score. Such errors can be difficult to identify, hence take out time to go through your credit score in detail.
There are three credit companies offering three credit reports. While the credit score may differ slightly in each case, if there is a huge difference between the number then there might be an error somewhere.
Some common errors include typos, such as entering $60 as $600, including balances you have paid or entering an amount twice.
If you identify such errors, be quick to get in touch with the issuing authority and they will correct it for you.
Look For a Company With Less Stringent Terms
Do not waste time going to banks if you have a low credit score. Banks are known to be strict when it comes to granting loans. Your best option is to turn to other parties, including online lenders, as they are lenient and may even offer loans to those with a low score.
However, be careful when selecting a lender. Some payday loan providers, for example, can be very costly with an ARP of 350 percent or higher.
Opting for such an expensive loan may get you trapped in a never ending cycle of debt. Plus, it may also impact your credit score in a negative way.
Instead, consider personal installment lenders. Such loans can come in handy and are easy to get.
Opt For a Secured Loan
A secured loan may sound like a bad idea on paper but such loans can be very effective if you have a bad credit score.
Lenders do not pay much attention to your credit score when it comes to secured loans.
They received guarantee in the form of collateral. However, you need to be very careful when applying for secured loans, especially when selecting collateral, as failure to pay would cause you to lose your asset.
The terms, however, are simple and the interest rate is also not too high in case of secured loans. You only need to submit an asset that is under your own name and higher in value than the value of the loan you have applied for.
Look for a Co-Signer
There are many benefits of getting a co-signer.
First of all, you will get a lower interest rate as it will be calculated based on your co-signer’s credit score.
Secondly, there will be a higher chance of success. However, it is important that your co-signer has a good credit score and that you two are on the same page regarding the loan.
This is very important because your failure to make timely payments will also impact your co-signer’s credit score.
Opt For a Home Equity Loan
Though risky, such loans can be very affordable as they allow you to borrow money for up to 30 years. Plus, the interest may also be tax deductible in some cases.
It’s the same as a secured loan as you will be using your property as collateral. Plus, some companies charge a fee when you apply for home equity loans. So, be careful and do your research.
Consider Joining a Credit Union
It may be a good idea to turn to a credit union if you have poor credit. Unlike most financial organizations, credit unions do not pay a lot of attention to your credit rating.
The difficult part, however, is becoming a member. We suggest that you search for credit unions close to you and apply for a membership. They will evaluate your application based on factors like your job history, educational background.
While your credit score is also considered, it’s not the most important factor. Becoming a member will make it easier to borrow money with bad credit.
Side Effects of Having Bad Credit Score
Even if you are able to get a loan with a low credit score, it is important that you work on improving it as low credit score has other side effects, too. The biggest drawback is the high interest rate.
Lenders like to work with individuals with good scores. They also offer lower rates to such individuals, hence it is important to improve your score.
Now that you know how to get a loan with poor credit, we hope you will face no difficulty in getting your application approved.