Having a bad credit score can make achieving your future goals and financial targets difficult. A bad credit score can make you miss out on home ownership, financial savings, and other benefits. A bad or low credit score can be more difficult to get banks and lenders to see you as anything more than a ‘high risk’ borrower. Unfortunately, many people don’t realize that bad credit isn’t permanent. There are ways you can improve your credit score. One way to do so is to take out an unsecured loan for bad credit.
How Does a Bad Credit Score Affect Your Life Day-to-Day?
While you can wake up every day and not think about your credit score, it still impacts your life more than you may realize. A bad credit score follows you through most financial endeavors and major life decisions.
Bad credit leads to higher interest rates on your credit cards and loans. Often, with bad credit, you can find credit card companies that will approve you for their card, but the interest may be magnified because of your credit score. The same is true of your car loan, home loan, and student loan interest rates.
Credit card companies try to appeal to people with better credit scores because they appear less risky. They persuade lower risk borrowers, with better credit scores, by offering lower interest and better rewards.
Trouble Obtaining a Loan
When you have a bad credit score, lenders are more hesitant to lend money to you. In fact, a lower credit score often results in an inability to secure a loan, at all. If a lender finds you too risky, they will simply not approve you for a loan.
If you’re trying to obtain a car loan, home loan, or a student loan, there’s a high probability that lenders may not offer you any loan options. This can leave you in a real lurch if you’re trying to further your education or obtain reliable transportation.
Limits Your Leasing Options
Your credit score even affects your leasing options. Whether you’re leasing a home or an apartment, or even an automobile, rental companies are going to run your credit to have a clearer idea of who you are financially. If you have a low credit score, they will project this onto your ability to pay on-time without missing your payments.
Many housing complexes, companies, and landlords have a minimum threshold for tenant credit scores. The last thing you want is to lose out on the ideal home or neighborhood because your score doesn’t meet a minimum.
Increase Your Deposit Amounts
If you have bad credit, you can expect a landlord or rental company to raise your deposit amount. They want to account for the risk they are taking by leasing to a person with a low credit score. Utility companies will often base your deposit amount on your credit score, too. This upfront financial burden can strain your bank account by tying up that money when it could be spent on moving expenses or other daily costs.
When you consider it, other than a credit score, how would a lender know that you’re going to repay them? This is one of the few ways that can see how reliable you are.
What is Considered a Bad Credit Score?
Credit scores can look like a foreign language when a person first checks their score. It can take some time to understand the credit scoring system, and how it works.
While some people have better credit than they realize, others think their credit is better than it really is.
If you’re unsure of what your credit score is, you’ll want to check it. While it can hurt your credit score to have too many lending agencies checking your score, you can check your own score easily without any harm being done.
The credit score system ranges from 300-850. 850 is considered a perfect credit score, and a 300 is the lowest a credit score can be. While not all “bad” credit scores are equal, most institutions would call any score under 619 a “bad credit score.”
After you check your score, you can see where you fall on the spectrum below.
- An excellent credit score is 700-850.
- A good credit score is from 680-699.
- An average or okay credit score is from 620 to 679.
- A low credit score ranges from 580-619.
- A poor credit score is usually between 500-579
- A bad credit score usually falls between 300 and 499.
Examining your score in reference to this spectrum can help you figure out how much work you have to do to get your credit score on the right track.
How Do People End Up with Bad Credit?
Understanding what affects your credit can help you understand how you can begin taking steps to improve your score.
The most commonly used credit score is the FICO score. While the makers of this system do not readily share exactly how the score is calculated, it is understood and agreed upon that it reflects the following, according to Money:
- 35% Payment History
- 30% Amount Owed
- 15% Length of History
- 10% New Credit
- 10% Types of Credit
“Payment History” accounts for about 35% of your score. This means that missing a payment will hurt your score more than any other factor alone.
The “Amount Owed” is also extremely important. This number is calculated based on the credit amount available to you in relation to how much of that amount you use and owe. This is also known as your “utilization ratio.” In other words, this compares how much lenders are willing to loan you and how much of that you actually use and carry over.
“Length of History” implies how long you’ve had your lines of credit. If you’ve had a credit card open for seven years, it looks better than if you’ve had seven credit cards for one year each.
Finally, “New Credit” and “Types of Credit” reflect how many new credit accounts you open and how many different kinds of credit you have. Opening too many lines of credit can lower your score while having a variety of types of credit will help your score. Some different types of loans include a mortgage, an automobile loan, a student loan, and credit cards.
Overall, showing lenders that you can manage paying different types of loans on-time over a significant period of time is essential to improving your credit score.
So, How Did You End Up with Bad Credit?
People don’t intentionally set out to have bad credit, and there are many routes one can take to end up with poor or bad credit. From acquiring credit cards at a young age and not making payments to poor credit utilization by only having one credit card, many of these mistakes are often innocent. Unfortunately, it can take some time to bounce back from these hiccups.
Common Credit System Misunderstandings
Sometimes people miss-prioritize their payments.
If a person has an outstanding debt shift to a collections company, they feel pressured to pay this off before making their minimum credit card and loan payments. It’s important to remind yourself: just because they’re calling doesn’t mean they should receive money that would go to your credit card payment. Missing a credit card payment has a larger impact on your score. This is because a debt sent to a collections company was already reported on your score. So don’t neglect a credit card payment that has the potential to help your score once made, or really hurt your score if skipped.
People believe checking their credit report or score will damage their credit.
Check your credit report. People often don’t realize that they have the right to check their credit report for free each year. By checking this from time to time, you can see what is being reported, and make sure there aren’t any fraudulent activities associated with your score. If you find inaccuracies or fraud, report it. This can quickly bump up your score once fixed.
People think, “having just one credit card improves your credit score.”
Don’t just rely on one credit card. If you have one credit card with a $1,000 limit, and you spend $950 on it every month buying groceries, gas, etc., it will appear like you overly use your allotted credit. Whereas, if you have two credit cards with $1,000 limits, and you spend $425 on each, it looks like you’re spending wisely which maximizes your credit utilization.
Additionally, you only accrue interest on the balance you carry over between cycles. If you can pay down your balance, the credit card company will not charge you interest on your spending.
What is an Unsecured Personal Loan?
While “unsecured” sounds complicated, it’s not. An “unsecured” loan is money loaned that doesn’t require you to put anything down upfront, before receiving the funds. Other forms of unsecured loans include student loans and credit cards. None of these require collateral.
A secured loan means that your loan is attached to a valuable belonging like a car or house. Additionally, an unsecured loan differs from secured loans in that, the lender cannot repossess the items you purchase using the loan money, like a home or a car.
But unsecured personal loans don’t have the limitations other unsecured loans have. Student loans can only be used on higher education expenses and credit cards have spending limits.
Many people refer to an unsecured personal loan as an “installment loan.” This means that these loans have a set number of payments over the course of a set amount of time. Whereas a credit card repayment does not have a definite deadline.
People most commonly use their personal loans for:
- Medical bills and debt
- Home renovations or repairs
- Wedding Expenses
- Funeral expenses
- Vacation funds
- Debt consolidation
How Can an Unsecured Personal Loan Improve Your Credit?
- Because an unsecured personal loan has a set repayment timeline, you can budget to pay it off, and you know what payments to expect. This form of long-term repayment is easy to manage so you’re less likely to miss a payment. Make sure you set a reminder in your phone or calendar. Better yet, setup up an automatic payment.
This will help you establish longevity of on-time payments. When it comes to improving your credit score, making payments in-full and on-time can significantly improve your score.
2. Many people choose to cut down on the complication of multiple payments to different credit card companies by bundling those debts into a personal unsecured loan. This pays off their credit card debt and can reduce their interest rates. It also creates an endpoint to the debt.
Rolling all of your credit card debt into one payment can simplify your payments and possibly reduce interest. Having fewer debts to juggle can help you keep track of payments so you’re less likely to miss one.
3. An unsecured personal loan adds variety to your types of credit. Having just credit cards can lower your score. By taking out a personal loan, you show lenders that you can manage various types of loans.
How Can You Get an Unsecured Loan for Bad Credit
There are numerous avenues you can venture down to find an unsecured personal loan for bad credit. There are lenders that will work with you to provide you the money you need if you provide the proper documentation. You will want to make sure you’re dealing with a reputable lender whose loan terms are manageable and within your means.
Prepare the Correct Documents
After deciding to acquire an unsecured loan, you will need to be prepared to show lenders that you are reliable, trustworthy, responsible, and that you have the financial means to pay back the money you borrow. You do this by showing your lender what your finances and life are like.
You want to prepare the following:
- Proof of Identification: a driver’s license, social security card, visa, or passport.
- Proof of Income: a bank statement, 3 months of pay stubs, or a letter from your employer, W-2 forms or tax returns
- Proof of Residency: a mortgage agreement, utility bill, or lease
- Employer Information for Contact: phone number, address, email address
Choose a Reputable Lender
Make sure the lender you choose is licensed in your state and is in good standings with the Better Business Bureau.
Choose What Repayment Works Best for You
Find a repayment plan that works for your income and lifestyle. The great thing about unsecured personal loans is that you know exactly what your monthly payment will be. Make sure that the repayment amount you agree to is workable with your other expenses and bills. For some people, a lower monthly payment is more manageable than paying down their debt in a short period of time.
Consider the different terms of repayment length. Once you receive loan offers, compare interest rates and how long it will take to pay back the debt. While lenders will factor your credit score into your interest rate, they will have different rates to compete with one another. You will want to calculate the length of repayment in relation to the amount of interest you will be charged to figure out what will work better for you.
Understand Your Loan
Make sure you understand the terms and conditions of the loan. Loan conditions are what your lender requires from you, as a borrower, to better understand your financial situation. They may ask you for clarification if you just switched jobs or if you just acquired a car loan. Terms are the time period you have to repay the loan and number of payments you will make.
You may come across a prepayment fee. If you pay back your loan before the agreed-to term comes to an end, a lender may charge you a fee to recoup the money they lost in interest.
Double-Check Your Information
Before finalizing your loan, make sure your income and information fit the loan requirements. If you anticipate a change in your financial status, it is your responsibility to account for this when applying for loans. If you don’t meet the loan’s income requirement, you will still be accountable for repayment.
Other Ways to Improve Your Credit Score
While an unsecured personal loan can help you improve your credit score, there are other means of tending to your score that can help it grow.
Keep Balances Lower: Keep your credit utilization score down by lowering your debt overall. This may mean you have to cut back on your spending, but paying back debt will help improve your overall financial health.
Find the Source of the Debt: As you’re looking into improving your credit score, make sure you notice any bad habits you may have and find ways to fix these habits. Use apps to help remind you when to pay. Set up automatic payments. Keep track of your spending and check your account balances often.
Make a Budget: Figure out how you spend and how much you need to spend then go from there. You may find that you’re spending more than you thought on certain novelties that you don’t need. Compare your income to your spending. You can always evaluate your budget and set limits on how much you spend on certain budgetary items.
Make Payments Higher than Required When you Can: While you may incur a prepayment fee when it comes to an unsecured loan, repaying your debt to decrease your utilization and boost your credit score and save you money in the long run. This is especially true when it comes to credit card debt.
Check Your Credit Report and Fix the Mistakes: As mentioned above, you should see what appears on your credit report. If there is fraudulent activity or mistakes, be sure to report them to the credit bureau. The credit bureau is required to investigate all items in question with 30 days. Include documentation that supports your claim, clearly mark the disputed issues, and state your request for deletion or correction
Being aware of your credit situation is the first step towards financial health. Once you take steps to raise your credit score, be patient. It will take time. Keep your goals in mind and make sure to not miss a payment.