Bad Credit Loans

What Does Bad Credit Loan Mean?

When applying for a loan, credit, or financing of any sort, one wouldn't apply for a bad credit loan. However, the condition your credit is in will determine the rate and terms of your loan; assuming that your credit even allows you to qualify for a loan. If you have bad credit, loans may not be available to you, or they will carry such high interest rates that you may never be able to pay them off.

Good vs. Bad Credit Loans

When you apply for a loan, the potential lender will check the status of your credit and determine your creditworthiness; which means your ability to repay a loan based on your credit history and credit score. Your credit score is a statistical analysis of the information on your credit report and is really the deciding factor as to whether or not you get a loan and under what terms. Your credit score is comprised of your payment history, the number and types of accounts you have, the age of your accounts, and outstanding debts.

Sometimes the potential lender will also look at other factors in addition to your credit score. These lenders rely on the three "C's"; Capacity, Capital, and Character to determine your creditworthiness.

Capacity – Your ability to make payments on your debts. The length of time you have held a steady job, your salary, and the amounts you owe on your debts are all factors used in the decision-making process. If you jump form job to job or only get paid minimum wage you are judged as having a poor capacity to repay. Also, if you have several other loans, particularly large ones, you may not be able to obtain another one.

Capital – The money in your bank accounts as well as the value of other assets are considered capital. If you are unable to repay a loan for whatever reason, the lender feels safer knowing that you could sell your assets and apply that money to your debt.

Character – What is your financial reputation? Do you make your payments regularly, on time, and for the full amount? If you are late even one month it could hurt your credit score and reputation. Do everything you can to make payments on time each month.

The three C's are also what go into calculating your score. The three major credit bureaus; Equifax, Experian, and TransUnion, each provide their own score. Each score could vastly differ from one another. Usually the lender will go with the middle score. The scoring model ranges between 300-900. Scores of 620-680 are considered average and you should be able to get a loan. Anything above 720 is considered good and you should have no problem obtaining a loan with the best rates and terms.

How to Improve Your Credit Score

Here are a few simple guidelines to follow if you want to improve your credit score:

Pay All of Your Bills on Time

Late payments can really damage your score and can be listed for several years.

Close Unnecessary Accounts

Too many trade lines, especially ones that have balances, can hurt your credit. The more open accounts you have also leaves you more vulnerable to fraud. A word of caution; be selective as to which accounts you close. Older accounts should typically be kept open. Even if you haven't used the account in a while, the longer it has been open will demonstrate a more established credit history. You may consider using these accounts lightly every few months and paying off the balances when they come due. You will thereby maximize the benefits of your older accounts.

Hold Off on Applying for Credit

You do not want to apply for credit while you are trying to repair it. You will not be able to qualify for favorable rates and terms until your report is in better shape. You will also be adding more damaging inquiries. If, however, it is absolutely necessary to apply, follow these guidelines:

• Do not open any accounts before you read all terms and agreements. Even if you close the account immediately it affects your score by listing too many trade lines not to mention you now have another inquiry on your report.
• Do not apply for cards that charge high interest rates, annual fees, and high over limit fees.
• Make sure the credit issuer reports to the CRAs

Pay Off or Reduce Your Credit Card Balances Each Month

Do not get maxed out and keep your debt ratio low. It is important for credit issuers to report credit limits to the bureaus. If they don't, the bureaus will take the highest amount that has been charged and use that as the limit. Let's say you charge close to that same high amount each month. It will look like you are charging close to your limit each month. If an issuer is not reporting the limit, simply request that they update this information; most will comply.

It is good to have a wide gap between the credit available to you and what you are actually using. A good rule of thumb is to keep your balances at around 30% of your total available limit.

Be Careful When Giving Access to Your Credit History

Not only are you compromising your privacy but are opening yourself up to becoming a victim of identity theft.

Let Your Credit Sit

Inactivity can be good. Constant balance transfers and inquiries can negatively affect your score.

Do Not Co-sign Loans

Even if your credit is to a point that you are eligible to be a co-signer, you are held responsible for these accounts if they go in to default.

There is still more you could do!

These are all great ways to improve your score but you will need to patient. These tactics could take years before they produce substantial results. If you want to see quicker results, there are other measures you can take in addition to the ones listed above.

Contact Legacy Legal Services if you would like help improving your credit and getting the loans you deserve.