Finance
February 2, 2024
Getting turned down for a loan due to bad credit is frustrating. How do you get bad credit in the first place and how do you fix bad credit?
You may feel like it’s the end of the road, but there are ways of getting the money that you need. You start by making sure you understand the problem.
What Is Bad Credit?
When someone tells you that you have bad credit, they usually mean that your credit score is too low.
Your credit score will usually come from one of two places – FICO or VantageScore. FICO is the older and more established of the two scoring companies, but VantageScore is gaining ground.
Both companies take information about your borrowing history, including your record of on-time versus late payments and the amount of your available credit that you typically use, and they run it through an algorithm. The result is a three-digit number between 300 and 850.
The higher your number, the better your credit. It usually breaks down something like this:
- 750 to 850: Excellent
- 700 to 749: Good
- 650 to 700: Fair
- 300 to 649: Bad
These numbers vary a bit among different sources. Lenders actually have complete freedom to decide what constitutes “good” and “bad” credit, so there are no hard and fast rules.
How Do You Get Bad Credit?
There are a number of reasons why your credit might be bad. Possibilities include but are not limited to:
Submitting payments late or missing them altogether
- Filing for bankruptcy
- Going into foreclosure on your home
- Getting a court judgment ordering you to pay off a debt
- Using too much of your credit
It helps to know which of these apply to you, so you know whether to try to fix it or find a loan that will take your score as-is.
How Do You Fix Bad Credit?
How you fix your score depends on why it’s bad.
If you have too much debt …
Get more available credit, either by opening a new card or increasing your limit on a card you already have. Whichever you choose, though, don’t use that credit! The point is to lower your ratio of credit used to credit available.
If you have overdue or delinquent accounts …
Negotiate with the creditor or collector. Sometimes if you explain why you’ve fallen behind and set up a payment agreement, the other party will remove the account from your record.
Hire a (reputable) credit repair service to contact creditors and negotiate on your behalf.
If you have errors on your credit report…
File a dispute with the credit bureau, or show the errors to a lender that you’re applying through and ask them to contact the credit bureau for a rapid rescoring. (This tends to be faster.)
How Do You Get a Loan With Bad Credit?
If you can’t wait to fix your credit, you can look for a lender that accepts lower scores. Don’t bother with the big banks – they tend to be more risk-averse and have higher minimum score requirements.
3 Loan Options for People With Bad Credit
1. Co-signed Loans
You can get a traditional loan with bad credit if you can convince a friend or family member to co-sign for you. But it’s not an agreement that you or the other person should take lightly.
Co-signing means that someone is putting their name on the loan. If you don’t pay, it could damage the person’s credit score and he or she could be forced to cover for you and pay the loan back. Also, if that person later wants to apply for a loan themselves, your co-signed loan will count against his or her debt-to-income ratio.
And those are just the financial consequences. If you default on the loan and your friend or relative is left holding the bag, that can put a serious strain on the relationship. Make sure that if you’re thinking of a co-signed loan, both you and your co-signer know what you’re getting into.
2. Peer-To-Peer Lending
From Uber to Airbnb, consumers are finding ways to get what they need without depending on large corporations. About 15 years ago, lending got in on the act.
It’s called peer-to-peer lending, and it took off in 2005 with the founding of Prosper. Since then, Prosper has connected more than 770,000 borrowers with billions in funds, and more peer-to-peer lenders have sprung up to offer similar services.
Since peer-to-peer lending happens between individuals, there is no pre-determined credit score minimum. That said, if you have a bad credit score, you probably won’t qualify for optimal rates.
3. Credit Union Loans
A credit union is a nonprofit, member-owned financial institution. It works by accepting deposits from members, much the way they would deposit into a traditional savings or checking account, and then organizing those deposits into pools of lendable money. A member can borrow from those pooled resources at specified rates.
To borrow from a credit union, you have to find one that you qualify to join and open an account. Once you’ve paid a minimum deposit, you can apply for a loan. You may still have to provide your credit score or report, but since these organizations are community-based, you can usually find someone with whom you can meet and plead your case.
Beyond Loans – Tapping Your Home Equity
Homeowners have more options than renters for getting quick cash, simply because they’ve built up equity in their properties. However, home equity loans and HELOCs can require high credit scores if you don’t have much equity. And even if you have plenty, you risk losing your home if you default.
You can also access your equity by putting your home on the market, but then you have to leave your home and find a new place to live. That adds a whole new level of stress and distress.
The Sale-Leaseback Option
Whether you are seeking to fund your business, student loans, or perhaps you need a home improvement loan with a bad credit score, a sale-leaseback can help. A sale-leaseback agreement allows you to sell your property and remain in place as a tenant, paying rent until you’re ready to move or re-purchase your home. It’s not a loan and can get you the cash to help you fix bad credit.
Key Takeaways
A sale-leaseback program doesn’t just let you get the cash you need to pay off debts and rebuild your credits. It puts you back in control. Talk to a financial advisor today to decide if a sale-leaseback is right for you.
