A Beginner’s Guide to Bad Credit Loans

Whether you’re looking to make a large purchase – like a house or a car – or you just need some financial relief to help you in an emergency, your credit history can play a big role in your ability to secure a loan. So, it must follow that if you have bad credit and run into one of these situations, you’ll be out of luck, right? Well, not exactly.

While bad credit may limit your options and affect certain aspects of the loans that may be available to you, there may still be bad credit loans that you could qualify for. We’re going to dive into some of the important details surrounding loans for poor credit and bad credit in general, and then go over some things you can do that may have a positive impact on your credit history.

What Does it Mean to Have Bad Credit?

When we talk about bad credit, one of the things we’re generally talking about is someone’s poor record of paying their bills in a timely manner. This might raise some concerns about the chances that they’ll continue to make late payments down the line. As such, this type of behavior (among other things) can have a big impact on your credit score.

How can this affect you? We’ve already touched on it briefly, but a poor credit history may make it harder for you to qualify for a loan, and the loans that may be available to you will likely come with higher interest rates. This is why it’s important to be aware of what your credit score is and to stay on top of it.

How do You Get Bad Credit?

If you have a credit card, have ever taken out a loan, or have missed payments on various bills (depending on whether the service provider reports missed payments), then you more than likely have a credit file with at least one of the three major credit bureaus. These are Experian, TransUnion, and Equifax. The information that these files contain is what makes up your credit score. But what information is this exactly? This can be the key to understanding how you get bad credit in the first place, and how you may work to improve your credit history.

What Factors Make up Your Credit Score?

While there are different scoring models, the one most frequently used is the Fair Isaac Corporation (FICO) score. There are five categories that make up this score. Let’s take a look at each of these.[1]

1. Payment History – 35%

This is the most substantial category on the list. Plainly, it speaks to your ability to make timely payments on your bills. Generally, the later you pay your bills, the worse effect it has on your credit score. This is one reason why it’s so important to pay your bills on time.

2. Total Amount of Debt You Owe – 30%

This category is geared towards any debt you may have. It can include the balances on your credit cards, your mortgage, auto loans, and more. An important facet of this section is what’s called your credit utilization ratio. This ratio is a way to compare how much credit you’re using to your total amount of available credit.

person doing research on bad credit loans.

For example, let’s say your only credit account is a single credit card with a limit of $1,000. If you’ve used $300 of that limit and haven’t paid it back, your credit utilization ratio is 30%. Generally, you won’t want the ratio to be above 30%.  

3. Length of Your Credit History – 15%

Generally speaking, the older your credit history is, the better. FICO considers things like the age of your oldest account, your newest account, and the average age of all your accounts. They also look at how long its been since you’ve used various credit accounts.

4. Credit Mix – 10%

They’ll also look at how many different types of credit accounts and loans you have on your file. This will include things like lines of credit, credit cards, mortgages, auto loans, and more.

5. New Credit – 10%

This category includes the accounts that you’ve opened or applied for recently. Generally, opening multiple accounts in quick succession can have a negative effect on your credit score, particularly if you have a relatively short credit history.

What is Considered a Bad Credit Score?

The range of FICO scores are between 300 and 850, and if your score is between 300 and 579, it’s considered to be poor.[2] In the eyes of a financial institution, this range indicates that there’s a reasonable chance that you’ll miss payments and may even become delinquent on your loan.

FICO considers a score that falls between 580 and 669 to be fair and views these people as less risky to lend to. While they may not be as risky as those with bad credit, their borrowing options may still be somewhat limited, and they may primarily just have bad credit loans with high interest rates available to them.

What are Bad Credit Loans?

So, now that we’ve established what bad credit is, it’s time to dive into the credit options that may be available for people of this profile; namely bad credit loans. These loans for poor credit are designed for people who have limited options when it comes to borrowing money.

person researching bad credit loans on laptop.

Generally, these types of loans fall into the category of personal loans for bad credit, with the operative word here being “personal”. These loans are meant to help you when you’re facing a financial emergency and don’t have an emergency fund at the ready. This could be things like a trip to the emergency room, an unexpected car repair, or an essential home repair.

Benefits and Things to Look Out for with Bad Credit Loans

The main benefit of these types of loans is fairly obvious; if the state of your credit score is making it difficult to get a loan, they may be an option. Another plus is that you also may be able to find bad credit loans online which may have a faster application process. This means that if you’re facing a financial emergency and need help in a pinch, they can be a useful option.

There is also a potential downside to consider. Because people with poor credit tend to be a higher risk, the rates of these types of loans are often higher.

4 Steps to Get Personal Loans for Bad Credit

If you’ve evaluated your financial situation and your potential options, and you feel like bad credit loans are the right choice for you, here are some steps for you to take to start this process.

1. Request Your Credit Report

The first step is to request your credit report so you have an idea of what type of loan you’ll be able to be approved for. You can see your credit report by:

  • checking credit card or loan statements, as some financial institutions have started providing this to their customers.
  • buying this information from one of the major credit bureaus or from FICO.
  • looking online for a service that provides your credit score for free.[3]

2. Research Your Options

Now it’s time to see what options may be out there for you. Do some research on different financial institutions, compare the rates and terms of different loans, and see what personal loans for bad credit are out there.

3. Assemble the Necessary Personal Information

Before applying for a loan, you’ll want to have the necessary personal information ready to make the application process as speedy and efficient as possible. While requirements will vary between financial institutions, you’ll generally need to show things like proof of income, your Social Security number, and your bank account information.

4. Submit a Request

Now that you’ve done your research and have your personal information ready, it’s time to submit a request for a loan! If you’ve earmarked more than one loan you’d like to apply for, start off by applying for one at a time. Like we mentioned earlier, applying for multiple loans in quick succession could potentially harm your credit score if these institutions are running hard inquiries into your credit report, so try to avoid that if possible.

4 Ways to Potentially Impact Your Credit History

While bad credit loans may be a useful option when you’re having a hard time getting approved for a traditional loan but need money for an emergency expense, ideally you don’t want to have to rely on them forever. If you’re looking to have a positive impact on your credit history, there may be some steps you can take to do this.

1. See if There are Errors on Your Credit Report

It may come as a surprise, but there might be false information on your credit report that could be hurting your credit score. But don’t worry. If you do end up spotting a mistake, there are steps you can take to get it removed. If you want a step-by-step breakdown of this process, take a look a this article here!

2. Make a Budget

While this won’t have an immediate impact on your credit score, a budget is a great way to keep your finances in order and help you avoid behavior that can harm your score, like missing bill payments.

person taking notes on bad credit loans in notebook.

There are plenty of resources online that can help you build a budget, as well as simple budgeting tips to help you save money!

3. Pay Your Bills on Time

While we’ve already mentioned the importance of paying your bills on time in the last section, it bears repeating! Payment history makes up the largest portion of your credit score, so it’s vital that you stay on top of your bills and make sure to avoid late payments.

While not all of your service providers will report your bill payments to credit bureaus, they may report missed payments.

Personal Loans for Bad Credit May Help in a Financial Emergency

The truth is, bad credit has the capacity to make the borrowing process more expensive than it would be otherwise. But it doesn’t have to stop you from getting the financial help you need when you’re facing emergency expenses without the savings to deal with them.

If you’re in a situation like this, do some research to see if there are personal loans for bad credit that may suit your situation. Once you’ve dealt with your emergency, you can get your finances back on track and start implementing healthy financial habits that may help you positively affect your credit history!

Disclaimer: This article provides general information only and does not constitute financial, legal or other professional advice. For full details, see CreditFresh’s Terms of Use.

[1] https://www.myfico.com/credit-education/whats-in-your-credit-score

[2] https://www.experian.com/blogs/ask-experian/credit-education/improving-credit/how-to-fix-a-bad-credit-score/

[3] https://www.equifax.com/personal/education/credit/score/how-to-check-credit-score/

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