How can I get a loan with bad credit?
If you have a credit score lower than 601, then you have something in common with 30% of the American population. Nearly one third of Americans have bad credit and have a very hard time applying for loans, credit cards and mortgages.
Why is my credit score low?
There are a multitude of reasons why your credit score is low. For the younger population, it usually signifies a lack of credit history. Unfortunately, if you have little to no credit history then you are scored poorly.
Other reasons your credit score is low include:
- Utilization rate is high: this means that you are overusing your credit which may appear that you are close to defaulting on a payment, even if you haven’t.
- High balances on credit cards: even just one high balance on a credit card will knock your credit score down a few points.
- You have applied for too many accounts: every time a company does a hard inquiry on your credit score, you get docked points.
- Defaulting: of course, not paying a debt does not look good on your credit report. Even just making small payments is better than ignoring it altogether. Do not let an unpaid bill get reported to collections.
How can I get a loan with bad credit?
If you need to get a loan and you happen to have bad credit, there are still options you can seek without getting instantly denied. Keep in mind that if your credit score is suffering, you should only be seeking a new loan if you are in desperate need, like an emergency.
First, you can seek to find a title loan. Most title loan companies do not even check your credit history. They will use your car as collateral for the loan. You are often able to get cash in hand within minutes of the approval process. You can anticipate high interest rates, but the process is generally super quick and easy.
Second, you can ask family and friends. It is very humbling to ask loved ones for money, but in tight spots you can see if the people who know you best can lend a hand/money. Understand though if you go this route, it can cause additional stress on your relationship with that person. Also, it will not help (nor hinder) your credit score in any way.
Next, you can find a co-signer. This is similar to asking a friends or family, but in this instance (if approved) you can work on bumping up your credit score.
Lastly, you can apply at a credit union. Sometimes, credit unions have options for people with below average credit scores. Usually, the interest rates will be higher and the approval process might take a little bit of time.
How can I improve my credit score?
Credit scores are used to gauge the likelihood that you will pay back a loan. When your credit score drops below 650, that is when you enter the high risk category and find that applying for credit often leads to denial.
The good news is that there are ways to improve your credit score. First, you have to know your credit score and sift through your credit history. This can easily be done for free on websites, such as Credit Karma. If you don’t know your history, it is certainly difficult to improve your score.
If your utilization rate is high (debt to limit ratio), you can request to increase your credit limit. Just call your lender and ask if the limit can be raised. The best thing to do is pay your debts down, but you can also ask for an increase to make this limit look better.
You may also find mistakes on your credit report. This does happen and if it is directly affecting your score, you should report it immediately. Reporting errors is free, but it can take time.
If your credit history is just short, then only time can heal that. What you will want to do while you wait is keep up with all your payments, without defaulting, and keep that debt to limit ratio as low as possible.
Also, do not close an account. Closing a credit card account can make your history essentially disappear and you will lose points.
Getting a loan with bad credit is not impossible. There are options if your credit score is less than stellar. However, you want to only get a loan with bad credit if it is truly essential or an emergency. If your credit score is below 601, then you really want to make adjustments to improve your score before inquiring to borrow funds.