Bad credit is when your credit score is lower than average. A FICO Score is a number that lenders use to help them make decisions about whether to give someone a loan. FICO considers a credit score to be poor if it falls below 580.
FICO is the industry standard for creditworthiness, used by over 90% of top lenders. Their scores help millions of people get the credit they need for a home, new car, or special purchase.
A FICO score is a number that represents your creditworthiness at this moment. The higher the more likely you are to get a loan. A score of 580 or below is poor. This means that you are more likely to default on your loan.
| FICO Score Ranges | Rating | Description |
| <580 | Poor | Well below the national average |
| 580-669 | Fair | Below average of US consumers |
| 670-739 | Good | Near or just above average |
| 740-799 | Very Good | Above national average |
| 800+ | Exceptional | Well above national average |
If you have a low credit score, it may be hard to get approval for things like credit cards, mortgages, and car loans. A low score can also mean having to pay extra fees or deposits, like for a credit card or home utilities.
But it doesn’t necessarily mean you won’t qualify for any loans or financial products.
What makes up a bad credit score?
It helps to know what makes up the FICO scores so if your credit is bad you know what to work on first.
- Your payment history (35%)
- How much you owe compared to your credit limits (30%)
- The length of your credit history (15%)
- The types of credit you have (10%)
- New credit (10%)
Payment history carries the most importance on your credit score. It accounts for 35% of your score, which means that if you have a history of making late payments or missing payments altogether, your score will suffer.
By keeping up with your payments to get a good payment history, you can improve your credit score over time.
These are things that can make up a bad credit score;
One is if you have a lot of debt. This can show that you’re not good at managing your money and that you’re a high-risk borrower.
Another thing that can make up a bad credit score is if you have a history of making late payments or missing payments altogether. This can show that you’re not reliable and that you’re not likely to repay your debts.
The 3 Most Common Factors That Make Up Your Credit Score:
Amount Owed
The amount of debt you owe impacts your credit score. If you have multiple open lines of credit, such as a mortgage and a personal loan, your total balance could affect your score. You might even see bad marks added to your credit score if you carry too much debt. In general, the lower your balances, the better.
Length Of Credit History
How long you’ve had credit cards, installment loans, home equity lines of credit, etc., matters. A longer length of credit history indicates that you’re less likely to default on payments.
Credit Mix
This refers to the types of credit you use. For example, do you primarily use credit cards or installment loans? Do you have one type of card or many? How often do you pay off your debts? These questions impact your credit score
How Do You Fix Bad Credit?
If you want to get a personal loan, it helps to have a great credit rating. A recent study found that people with excellent credit scores are able to borrow $2,500 more per month than those with poor credit ratings. This means that if you have a good credit score, you may be able to get a larger loan amount.
Here are 5 ways you can increase your score:
- Pay Off Credit Card Debt.
Credit card debt is a big problem for many people, and it can be very difficult to get out of the hole that you have dug yourself into. If you are in a situation where you owe money on your credit cards, then work on reducing what you owe by not using the cards and paying them down as soon as you can.
- Stop Using Credit Cards.
You may be spending more than you earn and not even realize it. It’s easy to overspend when you don’t actually fork over cash for things. If you can stop using your cards until you have your balances paid down, it will help increase your score by not adding more debt.
- Reduce Spending.
The first step to reducing spending is to reduce the amount of money you spend on take-out and other items that are not necessary for your survival. This will help you save a lot of money too.
- Save Money by Cutting Back on Extras.
Sit down and do a budget on what you spend now and see what you can live without. Seeing how much you spend on incidentals can surprise you. Keep a journal for a month and list every cent you spend.
- Make Extra Payments.
When you find extra money, pay down your credit cards first, then any loans you might have. Whatever you can pay towards the principal owing on a loan, will reduce the interest you will owe in the end.
Why Improve Your Credit Score?
There are many benefits to having a good credit score.
Here are 5 of them:
1) You can qualify for better interest rates on loans and lower insurance premiums.
2) You can get more expensive items such as cars, homes, etc.
3) You can get higher-paying jobs.
4) You will have access to better financing options when buying a home or car.
5) Your credit score is an indicator of how responsible you are with money.
What Is A “Bad Credit” Personal Loan?
As you would guess, a “bad credit” personal loan is a loan that is available to someone with a poor credit history and usually has a higher interest rate and shorter repayment times.
There are times when taking out a bad credit loan makes sense though.
If you’re facing financial hardship, such as medical bills or car repairs, a bad credit personal loan could help you pay off those expenses without damaging your credit rating. You might even see some improvement in your credit score if you don’t miss any payments.
Do Personal Loans Build Credit?
Personal loans can help build credit if the borrower makes their payments on time.
Personal Loans Can Help Build Credit In A Few Ways;
- First, make timely payments on loans. This shows lenders that you are responsible and will likely make payments on time
- Second, personal loans can help improve your credit mix, which is one of the factors that make up your credit score. Having a variety of types of credit can help improve your score.
- Finally, using a personal loan responsibly can help show lenders that you’re a responsible borrower, which can lead to better loan terms in the future.
- Using a loan to consolidate other debts. This can help to improve the borrower’s credit score by reducing the amount of debt they have.
Can You Qualify for a Personal Loan?
Lenders use your debt-to-income ratio to decide if you’re eligible for a personal loan. This figure is your total monthly payments in relation to your gross monthly earnings. If it’s too low, it may mean you can’t afford the repayments on a personal loan.
Your income should cover the amount of money you are borrowing plus an extra cushion. A good rule of thumb is to add 10% to your current budget to account for unexpected costs like car repairs, medical bills, and moving expenses.
To qualify for a personal loan for bad credit, you will need to have a steady income and a bank account in good standing. Your account must have been open for at least six months.
What Loans Are Available?
Secured personal loans
A secured loan is a type of loan that requires the borrower to provide some form of property, such as a car, house, or jewelry, as collateral in exchange for the funds.
This makes it easier for lenders to assess risk because it is unlikely that borrowers will not pay back the debt. While secured loans are safer options than unsecured ones, they come with a few drawbacks.
One potential drawback of secured personal loans is that they may have higher interest rates than unsecured loans.
This is because the lender may view the loan as being more risky, since they could lose their collateral if the borrower sells it and defaults on the loan.
Also, secured loans may have shorter repayment terms than unsecured loans, meaning that borrowers will have to pay back the loan more quickly.
Finally, borrowers may have to put up valuable personal property as collateral for a secured loan. This means that if the borrower defaults on the loan, the lender can take possession of the collateral to recoup their losses. This can put the borrower at risk of losing their home, car, or other valuable possessions.
Unsecured personal loans
An unsecured personal loan does not require collateral, such as real estate or cars. This type of loan is used to consolidate debt or pay off high-interest credit cards.
This means that if you default on the loan, the lender will not be able to seize any of your assets. Unsecured personal loans are generally more difficult to get than secured loans, and have higher interest rates.
Co-signed personal loans
Co-signed personal loans are loans in which two people agree to be equally responsible for repaying the debt. The co-signer agrees to make payments on the loan if the primary borrower is unable to do so.
A cosigner can help increase your chances of qualifying for a loan. If you will need a cosigner, you should have one before applying for a loan. Having a cosigner helps improve your odds of being approved for a loan.
But, there are some downsides to having a cosigner. You’ll pay more in interest rates and you’ll have to pay off the debt sooner. If you miss payments it will hurt your relationship with whoever you used to co-sign.
Online cash advance apps
If you’re looking for a short-term cash solution, you might want to consider an online lender.
These types of loans typically come with interest rates between 15% and 30%. It’s important to note that most payday lenders don’t let borrowers pay off their debt over time. Instead, the whole amount must be repaid within 14 days. If you fail to do so, additional fees and charges may apply.
Another option is to use a credit card to borrow money. While this isn’t considered a cash advance because the money is being taken directly out of your checking account, you still run the risk of hefty late fees. Plus, credit cards often carry high interest rates.
Payday Loans
Payday loans are short-term loans that are normally due on your next payday.
These loans can cover unexpected expenses or to tide you over until your next paycheck. Payday loans will have high-interest rates, so it is important to only borrow what you can afford to pay back from your next paycheck.
Title loans
These loans use your vehicle as collateral, and can be very expensive if you can’t repay them. If you default on a title loan, the lender can repossess your vehicle. This type of loan is best suited for people who own their own vehicle outright and need quick access to cash.
Buy now, pay later
These services are becoming increasingly popular, especially among millennials.
Buy now, pay later services let you to make purchases and then pay for them later, usually in installments. This can be helpful if you need to make a purchase but don’t have the money upfront. Some popular buy now, pay later services include Afterpay, Klarna, and Affirm.
How To Choose A Loan Company
There are a few things you should take into consideration when choosing a bad-credit loan company. First, make sure the company is reputable and has a good track record. There are many scams out there, so you want to be sure you’re dealing with a legitimate company.
Before choosing a lender, compare the following factors to find the best fit for your needs:
- Fees: Look for upfront fees and hidden charges such as late fees, prepayment penalties, and application processing fees. Also consider whether the lender offers additional perks. For example, does the company waive fees if you use the loan to buy groceries or pay utility bills? Does it let you rollover previous payments into future ones? Does it provide free online account access?
- Interest Rates: Most short-term lenders offer competitive rates, typically ranging from 15% to 30%. But keep in mind that the longer you make a loan term, the lower the effective annual percentage rate (APR). So, if you plan to make multiple small purchases, you could end up paying less overall by making shorter-term loans.
- Terms: Find out what types of documents the lender requires, how long you’ll have to wait to receive funds, and how long you’ll have access to the money. Also, look closely at the fine print to see whether the lender imposes early-payment penalties, finance charges, or other restrictions.
- Loan Amount: Before applying for a bad credit loan, determine how much you can afford to spend. This will help you avoid taking out too large a loan, which can lead to financial problems later.
Final Thoughts
Most people work hard to keep their credit score as high as they can but sometimes life throws a curveball and your credit score slides. Especially since the pandemic started. So many people are in need of a bad credit loan.
People are out there are struggling to keep up with their bills and payments, and their credit scores are suffering as a result.
If you’re one of those people, don’t despair – there are plenty of bad credit loans available that can help you get back on track. Just make sure to do your research and shop around for the best deal before you commit to anything.
