So you recently applied for a new line of credit and was denied. You did receive a letter explaining why you were denied and it was because you had a lousy credit score. There can be any number of reasons why you have a bad score but it’s basically due to the way you’ve handled your credit. Two of the biggest factors in your credit score are your credit history and credit usage. The problem may be the way you handled the two of them.
Credit history and usage
Your credit history is simply how you handled credit. If you made late payments or missed payments this will have a very negative affect on your score and you will have bad credit. Some experts believe that just one late payment would drop your score by as many as 60 points. If you are late twice, that could be more than 100 points, which could drop you into “poor” or even “bad” credit. The second component, credit usage, is the ratio between the total amount of credit you have available versus the amount you’ve used. As an example of this, let’s say you have $10,000 in total credit available and debts of $7500. This yields what’s called your debt-to-credit ratio of 75%, which would be much too high.
You need a loan
Regardless of why you have a low credit score this doesn’t change the fact that you need a loan. Fortunately, there are ways to get a loan even when you do have bad credit.
- Peer-to-peer loan
- Pawn something
- Borrow from your retirement fund or life insurance
- Get a co-signer
A new and increasingly popular way to get money when you don’t have great credit is through peer-to-peer lending. This is where you borrow money directly from a person or group of people with no third-party financial institution involved. The Lending Club and Prosper Lending are peer-to-peer lenders. They generally make loans up to $30,000 with interest rates that vary from 6.75% to 29.99%. If you have a low credit score, you will likely be charged an interest rate on the higher end of the scale. We did see one example of a woman who borrowed $10,000 from the Lending Club at 14.73%. This would indicate that she probably had a “low” credit score of somewhere between 560 and 628. If your score were lower than this, you would definitely have a higher interest rate. But regardless of how bad your score was, you could probably find a lender willing to take a chance on you but would charge accordingly.
If you have something of value that you could part with either for some period of time or permanently, you could get money by pawning it. We saw a number of new pawnshops open up in our town as a result of the Great Recession and they seem to still be doing a good business. They charge fees just as do the payday lenders plus interest. The way most work is that you will need to either reclaim your item within 30 days or roll it over into a new “loan.” Or you could simply let the pawnshop keep and sell it.
Get a bad credit loan
Yes, there are loans actually called bad credit loans. In fact, if you search on the term “bad credit loans” you will discover literally dozens of online lenders that do these loans. In general, these lenders offer loans up to $5000 and again, the interest rates are likely to be very steep. Why is this? It’s because these are unsecured, personal loans and the lenders are taking more of a risk. If you were to default on your loan, there is basically nothing they could do except harass you for their money.
Find a co-signer
At least one financial counselor believes the best way to get a loan with bad credit is to get a co-signer as he explains in this video.
If you’re more interested in rebuilding your credit than just borrowing more money, you could get a secured debit card. This is where you deposit some amount of money and then use the card just as you would a regular credit card until you reach a zero balance. At that point, you will need to either add more money to the card or quit using it. In some cases these cards are tied to savings account so that you could continue to use it so long as you had money in that account. In either event, the debit card company will report how you’ve used the card to the three credit bureaus. Assuming you use it sensibly, this can help you rebuild your credit. In fact, in many cases if you use that secured card sensibly for a year, the bank will then offer you a regular credit card.