Nobody wants a bad credit. But even if you did end up in that situation, it does not make you a bad person, and neither does it make getting a load absolutely impossible. However, you might find it a lot more difficult to get loans at good rates. So what do you need to know about applying for a loan with bad credit? Here are some answers.
Credit scores are like your GPA
To further understand how credit scores work, just think of it as your credit GPA.
In college, you study different courses, and are graded for every assignment and project. At the end of the course, you also get a grade for your overall performance. And at the end of the semester, you receive a single score based on all the work you did in all your classes — your GPA.
Credit reports and credit scores work the same way. The reports contain a list and details of the money you owe, and whether you are paying it off as agreed. This makes credit scores your GPA. It is based on the data in your credit reports, and helps lenders understand how you manage credit. Lenders usually look at both when they decide whether to approve you for a loan.
Various companies use credit-scoring models to generate credit scores. FICO scoring models are one of the most commonly used by lenders when evaluating credit applications. Their base scores range from 300 to 850, and are defined through the following ranges:
- Poor: 579 below
- Fair: 580-669
- Good: 670-739
- Very good: 740-799
- Exceptional: 800+
When the average national score is high, at 700 for example, people whose credit scores are in the fair to poor ranges may find it a lot more difficult when getting approved for certain loans.
Missed payments, maxed out credit cards, and derogatory marks on credit reports (e.g. foreclosure and bankruptcy) can cause your credit score to plummet.
Lenders can have unique cutoff credit scores, and falling below these cutoffs makes it less likely for you to be approved for a loan. Different lender types may also have different score requirements depending on the type of financial product.
You can apply for a loan with bad credit
When your credit scores are in the 500s, it may be difficult or costly for you to qualify for a personal loan. But payday lenders and some other alternative lenders might give you a loan without considering your credit scores at all. However, the interest rates they charge tend to be extremely high.
Most people think that low credit scores limit their options to alternative loans. But although they seem attractive because they do not require a credit check, these loans can be quite expensive in the long run. A better option will be to look for lenders who grant short-term loans despite bad credit.
Bad credit is not permanent. Derogatory marks, including bankruptcies, fall of credit reports after seven to ten years. The older the information is, the less impact it has on your score. In the meantime, work on rebuilding your credit. Make sure to pay your bills on time and pay off your debts. Should you get a loan with your bad credit, use it to make your situation better.