If you have bad credit or no credit, getting a loan may be a challenge, let alone a loan with a manageable interest rate.
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And welcome back. My name is Laura Adams. I’m a personal finance expert and award winning author who’s been writing and hosting money girls since 2008 on this show, you probably know if you’ve already been listening, I help you get the knowledge, resources, and motivation to manage your money with confidence. My goal with every episode is to leave you with some practical tips and tactics that you can use right away to create a richer life, and if you’re a new listener or maybe even one who’s been in the money girl community for a while and you have not rated and reviewed the show yet, I would really appreciate you taking a minute to submit a very short five star review on iTunes. That’s what Cajun impression did. Who says, thank you, Laura for sharing valuable information about finances. You’ve motivated me to take action and be accountable for my spending.
I feel empowered and better about my future. One of my short term goals is to learn something about finances on a daily basis. This action serves as positive reinforcement so I can stay focused on my finances. Thank you. Thank you, Cajun impression. I love that and I do think that learning a little bit, a little bit at a time is a great way to do it. And podcasts are an excellent resource, so thank you so much for tuning in and being a part of the community. If you’re listening on a smart phone, you can swipe the shows, cover art, and easily submit a rating or review and I read all your feedback and it really means a lot to me. Plus it helps new listeners find us and know what the show is about. And speaking of that, today’s show is about credit. We’re going to talk about what happens when you don’t have good credit or you have no credit.
This is a problem that many folks are struggling with. So if you have had the wind knocked out of your credit scores, maybe due to some temporary financial problems or because you are really struggling to build credit for the first time, it can be pretty challenging to get a loan. You’re probably going to get some pushback. So it’s critical to understand the factors that affect your credit and how to build it quickly. In today’s show, I’m going to give you five ways to find a loan, even if you have bad credit. As always, you’ll find the notes for the show and the full archive of podcasts in the money girls [email protected] this is episode 626 called five ways to get a loan with bad credit. You probably already know that having bad credit is a major stumbling block to getting a traditional loan. The problem is lenders are going to view you as a high risk customer who might not repay them.
It’s just a fact that until you raise your credit scores, you’re not going to fit into a standard lending guideline that traditional big banks have to follow. So let’s talk about what are the factors that go into making up your credit scores? You know, how are these scores even created in the first place? Well, there’s a common credit misconception that I want to make sure you don’t believe, and that is that you only have one credit score such as fiko. Now, while phaco is very well known, it’s a very popular type of score. There are hundreds, literally hundreds of different credit scoring models that are used by mortgage lenders, credit card issuers, insurers and merchants. There are even multiple types and versions of FICO scores. So credit scoring models are all a little different. They all use algorithms to crunch the data in your credit reports.
Credit reports are maintained by several nationwide credit bureaus. These include Equifax, Experian, and TransUnion. So a lot of people say, well, are you know, if there are so many different credit scoring models, how do I know what is a good credit score? So that’s a good question because they all have a different score range. Let me give you some examples. The FICO auto score that gives you a range from 250 up to 900 FICO also has a mortgage score that’s on a different scale. It ranges from 300 to eight 50 TransUnion also has a score ranging from 300 to eight 50 and there’s a vantage score that ranges from 501 up to nine 90 so as you can see, the scales are not apples to apples. When we’re talking about comparisons here, and in addition to assigning different score ranges, credit scoring models, and for size different factors.
For instance, having missed a payment on an auto loan might be weighted more heavily when factored into an auto-scoring credit model. The exact formulas of credit scoring models are proprietary. However, FICO has said that they use the following five factors as waits for their credit score. So let me go through what they have said is a factor, and I believe this is for their mortgage score. So payment history makes up 35% so this is the largest category and it’s weighted the most heavily. This is going to include late payments and any accounts you may have in collections, any bankruptcies. These are all of the top-rated factors. So the takeaway here is that making payments on time is simply critical. You’ve just got to do that in order to maintain high credit scores. The second most important factor is called amounts owed. This is 30% according to FICO.
This is the debt that you have compared to your available credit, which is known as your credit utilization. And it’s also the total amount of debt that you have, uh, across all of your credit accounts. So the takeaway with this category is that you want to use a smaller percentage of your available credit. So this is going to be the available credit on your credit cards or any lines of credit that you have using less event is going to boost your credit scores. The third category is the age of your credit history. This makes up about 15% of your credit score. This is how long you’ve had credit accounts open. And the takeaway is that having older accounts improves your credit scores and new credit inquiries. This is the fourth type. This makes up 10% new credit inquiries are the new applications that you submit.
These can temporarily lower your credit score. Now, this does not apply when you’re checking your own credit. That’s considered a soft credit inquiry. What I’m talking about here are the hard inquiries per new credit applications, and the takeaway is that applying for credit cards, retail store cards, or any loan should only be done when you genuinely need them. You don’t want to just apply for a bunch of new credit accounts because that is going to be a ding on your score. Only use those new accounts when you really need them. And the final category is called the mix of credit. So this is 10% of your score. The mix of credit is the variety of credit accounts that are in your name, such as credit cards, auto loans, and mortgages. In general, having a mix of credit types does help improve your credit scores due to the ongoing changes in these factors.
You know, they’re, they’re constantly changing month and month out. Your credit scores fluctuate a few points from month to month. However, if you’ve got an unexpected drop, let’s say your credit scores drop 20 points or more, that may be an indication that you’ve got a serious problem that you should investigate right away. So let’s talk about checking your credit and what to look for. You definitely want to keep tabs on your credit reports and, and it’s pretty easy to do. It’s really a smart way, not only to protect your credit but to recognize any signs of identity theft that may be happening and you can view or download your credit reports for free once every 12 months at the official credit reporting site, which is annual credit report.com however, you can use other credit sites and get a lot more information and get it a lot more frequently than just once every 12 months.
So using a site like credit karma or credit Sesame, these are sites that allow you to get your credit scores pretty much as often as you like. They may in some cases limit it to once a week, but, but that’s plenty. These sites give you free credit access, free alerts, and a lot of helpful information to raise your scores when you’re reviewing your credit reports. Look for errors or any evidence of fraud that may be dragging down your scores without you knowing it. I mean that could be a cause of bad credit problems, could include accounts that you didn’t open. That’s a major sign that you have become the victim of identity theft and you need to act on that immediately. You could also see inaccurate late payments, like you made a payment, but it’s showing that you didn’t make the payment or that you paid it late inaccurate account balances.
So maybe it’s showing about a balance but you paid off that account or you know it’s not that high. Or it could be incorrect available credit limits. So maybe it’s showing a low limit when you know that a credit card raise your limit. For instance, if you spot any errors, file an online dispute with each of the credit bureaus using their websites, then you want to contact the creditor that reported that erroneous information and ask them to correct the data. So keep checking your credit reports to make sure that any problem does get resolved and that you do see your credit scores begin to rise. So a common question that I get is, well Lara, you know what? If I don’t have any credit, maybe I’ve just been relying on a spouse’s credit or I’m in college and I’ve never had a credit card before, I’m kind of building credit from scratch and I have nothing under my name.
Well, a lot of people mistakenly believe that if you have no debt in your name that you must have great credit. Unfortunately that’s not true. Having no credit is actually the same is having bad credit to have good credit, you’ve got to have credit accounts in your name and use them responsibly. If you have thin credit history, which is an industry term, that means basically you just don’t have much in your credit file. If you’ve got a thin history, you just don’t even have enough data to generate a credit score. Without that information. And without a credit score, lenders and merchants have no way of evaluating how likely you are to repay your bills. And they’re probably going to deny you credit and while we’re talking about credit myths and misunderstandings, you might be interested in a recent podcast called 12 credit myths and you should know that’s episode number 534 I want to thank LightStream for supporting money.
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The rate includes 0.5% autopay discount terms and conditions apply and offers are subject to change without notice. Visit lightstream.com/money girl for more information and I also want to share an exciting opportunity from my fellow quick and dirty tips. Expert grammar girl. On February 25th she’s hosting a special AP style writing webinar. If you do any writing, whether it’s for a blog, academic journal, or just daily emails, you need to be confident in your writing abilities. Errors can hurt your credibility and block your path to success. So if you need some help, this webinar is for you. Grammar girl will help you learn key skills like how to use abbreviations, how to format, punctuation, and how to remember tricky exceptions to grammar rules. She’ll even be taking your questions live. You’ll also receive the presentation slides and handouts used in the webinar to refer back to save $90 when you sign up for the webinar today, go to bit dot L Y slash AP webinar 2020 that’s bit dot L Y slash AP webinar 2020 so let’s talk about how to actually go about getting alone when you’ve got bad credit.
If you’ve been turned down for a loan or maybe you don’t want to get stuck paying a high subprime interest rate on a loan, which is typically what happens when you have poor credit. Let me give you five alternatives to consider. We’ll go through five ways that may apply to you. Maybe not all of them are going to apply, but if one does, that may be the ticket to getting the loan that you need. Number one is get a home equity line of credit. And this is a topic that I podcasted about in show number 558 if you want to learn a little bit about what a home equity line of credit or he lock is, this is going to apply if you’re a homeowner and if you’ve got enough equity in your property, you may be eligible for a low interest tax deductible line of credit to spend any way you like.
So this might be a situation where you bought a home, you had good credit, but now you’ve had some financial hardships. Maybe you’ve been through a divorce or something is going on in your life where your credit has plummeted and now you’re not in a great situation. So if you are a homeowner, this could be an option. Of course, tapping your home equity, put your property in jeopardy if you can’t repay the debt. But if you have a reliable source of income and you are disciplined about paying down an equity line, it’s a very inexpensive option. So regardless of your credit score, that could be a very inexpensive way to borrow. The second option to get a loan could be trying a credit union. Credit unions are nonprofit organizations known for offering very high levels of customer service and low fees. There’s similar to banks, but they are owned by their members who typically have something in common such as living in the same County or working in the same industry.
If you want to find a local or a nationwide credit union, you can find [email protected] then you want to contact the credit union to discuss getting a personal loan, so if you are eligible for membership, you know, go ahead and apply or figure out what you need to do to become a member and a lot of cases it’s a pretty simple application process and then talk to them about getting a personal loan despite your challenge it with your credit score. Of course, compare loans from several institutions if you can, so you know that you’re getting the lowest interest rate possible before you sign the final loan paperwork. All right. The third option to consider is to use a lending platform. Online platforms that use innovative criteria and technology could be a great alternative to getting a loan from a traditional lender. For instance, peer-to-peer lenders such as lending club allow you to borrow directly from an individual instead of from an institution, borrower’s post alone listing that includes the amount they want and why they want it.
Investors then review loan listings and choose the ones that meet their criteria. Peer-to-peer lenders will screen applicants and they will check your credit and that will become a part of your loan listing. But while your credit score is a factor, an individual investor may be more empathetic to your situation than a traditional bank. The fourth option to consider is taking a loan from family or friends. If an online peer will not lend to you, maybe you’ve got family or friends who will. Now I want you to treat any loan that you get from family or friends, just like a business transaction, and I would recommend that to avoid any misunderstandings, create a written agreement with the interest rate, the payment terms, and any collateral that you might put up for the loan. And don’t forget to clarify what happens if you fail to repay the debt.
I don’t want you to let any loans that you might take or give to family or friends get in the way of that relationship. It’s just that’s not worth it in order to create a valid promissory note, you can get a template from sites such as rocket lawyer or legal zoom, and if you’re borrowing money from friends or relatives in order to buy a home, you want to make sure that that loan is secured properly in order to take advantage of the mortgage interest deduction. So to properly register and manage a home loan with a relative, you might check out a source called national family mortgage.com the bottom line is that a family loan has got to benefit everyone involved and it should be a last resort. You don’t want to risk letting a close relationship go sour over a potential bad debt. All right?
The last option to consider is find a co-signer. If you don’t have a friend or family member who’s willing to give you a loan, perhaps one with good credit would be willing to co-sign alone with you. Just remember that if you don’t repay the debt, the creditor will look to your co-signer for full payment, not half payment but full payment. Also, the payment history for a co-sign loan does get recorded on both of your credit reports. That could be devastating for your co-signer. If you don’t hold up your end of the bargain and you make late payments or you default and you know likewise, if they don’t hold up their end of the bargain, late payments would show up on your credit report as well. So co-signing is something to take very seriously and make sure you only do it with someone that you trust completely.
If you exhaust all of these options that I’ve covered and you still can’t get a loan, just stay focused on improving your credit scores by correcting any errors on your credit reports, paying your bills on time, and never maxing out credit cards. And before we go, I want to invite you to learn a lot more about your credit. It’s such an important topic. You can do that by joining me in my online class called build better credit, the ultimate credit score repair guide. I was so excited to create this course because I know many of you want to build your credit. You want to get all the money saving benefits that come with it, like finally getting approved for more affordable, low interest credit cards and loans. You deserve that and it will save a ton of money. Your credit has ripple effects through your entire financial life and building.
It improves your life by leaps and bounds. So if you wonder how the credit system really works or you can’t seem to improve your credit, maybe you’re feeling stressed about debt and you want the exact steps to fix your credit on your own, that’s exactly what you’ll come away able to do. You’re going to get the tips, hacks, and systems to follow to improve credit quickly. So if you want to radically improve your credit, I want to help you join students who are learning at their own pace, have lifetime access to the lessons and resources and are transforming their financial lives. The sooner you get started, the sooner you’re going to have more money leftover at the end of the month to finally get ahead and no, you’re on the right path. So I’d invite you to learn more by texting me. Just text the phrase credit course with no space text credit course to the number three three four, four, four and I’ll send you an email with a link for 60% off or you can get the discount for a limited [email protected] check it out and I’ll see you in class. Money girl is produced by the audio wizard, Steve Ricky Berg with editorial support from Karen Hertzberg. To learn more,
check out the back list episodes and show notes [email protected] That’s all for now. I’ll talk to you next week. Until then, here’s to living a richer life.
If you’ve had the wind knocked out of your credit scores due to financial problems, or because you’re struggling to build credit for the first time, it can be challenging to get a loan. It’s critical to understand the factors that affect your credit and how to build it. You might be surprised to learn that you have more options than you think. I’ll give you five ways to find a loan, even with bad credit.
Having bad credit or no credit is a major stumbling block to getting a traditional loan. Lenders view you as a high-risk customer who might not repay them. It’s just a fact that until you raise your credit scores, you won’t fit standard lending guidelines that traditional big banks have to follow.
Factors that affect your credit scores
A common credit misconception is that you only have one credit score. Although FICO is probably the most well-known type of score, there are hundreds of different credit scoring models used by mortgage lenders, credit card issuers, insurers, and merchants. There are even multiple types and versions of FICO scores.
Credit scoring models use algorithms to crunch the data in your credit reports, which are maintained by several nationwide credit bureaus, including Equifax, Experian, and TransUnion. Here are ranges for some popular credit scores:
- FICO Auto Score: 250 to 900
- FICO Mortgage Score: 300 to 850
- TransUnion: 300 to 850
- VantageScore: 501 to 990
In addition to assigning different score ranges, credit scoring models emphasize different factors. For instance, having a missed payment on an auto loan might be weighted more heavily when factored into an auto-scoring model.
The exact formulas of credit scoring models are proprietary. However, FICO says they use the following factors and weights as a baseline for their credit scores.
- Payment history (35%). A record of late payments, accounts in collections, and bankruptcies. This is the top-ranking factor. Takeaway: Making payments on time is a critical factor for maintaining high credit scores.
- Amounts owed (30%). Your debt compared to your available credit, which is known as credit utilization. Takeaway: Using a smaller percentage of available credit you have on credit cards and lines of credit boosts your credit scores.
- Age of credit history (15%). How long you’ve had credit accounts open. Takeaway: Having older accounts improves your credit scores.
- New credit inquiries (10%). Applications for new credit accounts can temporarily lower your score. Takeaway: Applying for credit cards, retail store cards, and loans only when you genuinely need them improves your credit scores.
- Mix of credit types (10%). The variety of credit accounts in your name, such as credit cards, auto loans, and mortgages. Takeaway: Having a mix of credit types helps improve your credit scores.
Due to ongoing changes in these factors, your credit scores fluctuate a few points from month to month. However, an unexpected drop of 20 points or more may indicate a problem that you should investigate right away.
How to check your credit reports for bad credit
Keeping tabs on your credit reports is easy and a smart way to protect your credit and recognize the signs of identity theft. You can view or download your reports every 12 months at the official reporting site, AnnualCreditReport.com.
However, you can get both your credit reports and one or more credit scores as often as you like by signing up at Credit Karma or Credit Sesame. These credit sites give you free credit access, alerts, and helpful information to raise your scores.
When you review your credit reports, look for errors and evidence of fraud that may be dragging down your scores without you knowing it. Problems may include accounts you didn’t open, inaccurate late payments, account balances, or available credit limits.
If you spot any errors, file an online dispute with each of the credit bureaus using their websites. Then contact the creditor that reported the error and ask them to correct the data. Keep checking your credit reports to make sure the problem gets resolved, and your scores rise.
No credit is the same as bad credit
Many people mistakenly believe that if you have no debt, you must have good credit. That’s not true. Having no credit is the same as having bad credit. To have good credit, you must have credit accounts and use them responsibly.
If you have a “thin” credit history, you don’t have enough data in your file even to generate a credit score. Without a credit score, lenders and merchants have no way of evaluating how likely you are to repay your bills and will probably deny you credit.
How to get a loan with bad credit
If you’ve been turned down for a loan or don’t want to get stuck paying high, subprime interest rates, here are five alternatives to consider:
1. Get a home equity line of credit
If you’re a homeowner with enough equity in your property, you may be eligible for a low-interest, tax-deductible line of credit to spend any way you like.
Of course, tapping your home equity puts your property in jeopardy if you can’t repay the debt. But if you have a reliable source of income and are disciplined about paying down an equity line, it’s an inexpensive option, regardless of your credit score.
2. Try a credit union
Credit unions are nonprofit organizations known for offering high levels of customer service and low fees. They’re similar to banks but are owned by their members, who typically have something in common, such as living in the same county or working in the same industry.
Compare loans from several institutions so you know you’re getting the lowest interest rate possible before you sign the final paperwork.
3. Use a lending platform
Online platforms that use innovative criteria and technology may be a great alternative to traditional lenders. For instance, peer to peer (P2P) lenders, such as Lending Club, allow you to borrow directly from an individual instead of from an institution. Borrowers post a loan listing that includes the amount they want and why they want it. Investors review loan listings and choose the ones that meet their criteria.
Peer to peer lenders screen all applicants and check your credit, which becomes part of your loan listing. While your credit score is a factor, an individual investor may be more empathetic to your situation than a traditional bank.
4. Take a loan from family or friends
If an online peer won’t lend to you, perhaps you have family or friends who will. Treat a loan from those you know just like a business transaction.
To avoid misunderstandings, create a written agreement with the interest rate, payment terms, any collateral you put up for the loan. Don’t forget to clarify what happens if you fail to repay the debt. You can get promissory note templates from sites such as Rocket Lawyer or LegalZoom.
If you’re borrowing money to buy a home, the loan must be secured properly to take advantage of the mortgage interest deduction. To properly register and manage a home loan with a relative, check out NationalFamilyMortgage.com.
The bottom line is that a family loan must benefit everyone involved and should be a last resort. You don’t want to risk letting a close relationship go sour over a bad debt.
5. Find a co-signer
If you don’t have a friend or family member who’s willing to give you a loan, perhaps one with good credit would be willing to co-sign a loan with you. Just remember that if you don’t repay the debt, the creditor will look to your co-signer for full payment.
Also, the payment history for a co-signed loan gets recorded on both of your credit reports. That could be devastating for your co-signer if you don’t hold up your end of the bargain and make late payments or default.
If you exhaust these options and still can’t get a loan, stay focused on improving your credit scores by correcting any errors on our credit reports, paying bills on time, and never maxing out credit cards.
Published by Debt.com, LLC