In a world where credit reigns supreme and credit scores are a weighty matter, having bad credit can restrict your options in securing personal or even business loans. But bad credit does not mean the end, as there are still options you can explore to get needed funding, such as opening a line of credit, credit cards, using peer-to-peer loans, and paycheck advances. While it may be challenging, taking out a loan even with bad credit is, in fact, possible.
Bad Credit: How Bad Is Bad?
It’s one to suspect that you have bad credit and another to exactly know where you stand. Common credit scores utilize the Fair Isaac Corporation (FICO) scoring model with the following ratings:
- Very Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very Good: 740-799
- Excellent: 800-850
FICO credit scores are computed based on a number of factors that comprise the following:
- Payment history (35%): Refers to your payments on past credit and places emphasis on paying these dues on time
- Amounts owed (30%): Tallies the total amount of credit and loans you have versus your total credit limit
- Length of credit history (15%): Takes into account the duration of your credit
- New credit (10%): Pertains to the frequency of opening new credit accounts
- Credit mix (10%): Is a combination of credit cards owned, loan installments, finance company accounts, mortgages, etc.
A FICO credit score on the very poor range means that you have the tendency to miss out on payments and such a connotation has many disadvantages. The most dreaded disadvantage is, of course, loan denials. Not being able to take out a loan may mean limited resources and may be enough reason to despair. But in truth, applying for a loan with bad credit is possible. The good news is that most lenders nowadays check on your credit score and alternative data to determine your repayment ability and even work out amenable payment terms.
Line Of Credit
Unknown to those with such precarious credit scores, a line of credit is a favorable option as this allows the borrower to access cash on demand and pay interest only for the amount used.
A line of credit is issued by any financial institution as a type of flexible loan with a pre-determined limit that a borrower can use as needed. It charges the borrower only when money is drawn from the line of credit and can be paid immediately or during a specified duration. Money taken from a line of credit has the same purpose for both individual and business lines of credit, which is to fund certain expenses or projects without knowing its actual cost. Examples of these can include estimated quarterly tax payments, weddings or home improvement projects for a personal line of credit, and business ventures and working capital for businesses.
There are different lines of credit you can use:
- Personal Line Of Credit
This is distinguished as secured (requiring collateral) and unsecured (no assets involved but with larger interests).
- Home Equity Line Of Credit (HELOC)
This is often termed as a “second mortgage” as this uses your home as a guarantee for your loan. This type of secured loan can qualify you for lower interest rates and more favorable terms, but being unable to post payments on time can put your home at risk of being sequestered by the bank.
- Business Line Of Credit
This provides the needed capital for business-related expenses or funding for investment opportunities. This can bridge the gap between monthly income irregularities and as allocation for projects that may have unforeseeable costs.
Compared to credit cards and traditional loans, a line of credit can be very practical as it allows you access to funds when you need it, rather than applying for a loan and then waiting for its approval. It serves as a sort of savings plan that you can use as the need arises. A line of credit is also cheaper than a personal loan, as it enables you to have substantial amounts available over time compared to online lending cash loans that provide small sums. It also serves as a better option than payday advances and pawnshop loans, as the credit evaluation process is much simpler and the cost of funds are considerably lower.
Just like credit cards, a line of credit also requires minimum monthly payments and interests based on your outstanding balance. Given that what you borrow is the amount you pay, a line of credit can have variable interest as well. Some may also have origination fees so it’s a healthy habit to read the fine print in terms of the charges that come with obtaining a line of credit.
Steps In Acquiring A Line Of Credit
Whatever line of credit is applicable to you, this type of loan can have a positive impact on your credit score by building your credit. This is the case when you don’t use the entire amount entitled to you, as it increases your utilization ratio (the total amount of loans and credits against your actual credit limit). Keeping payments current for a line of credit can also improve your repayment history and build up your credit history, thus increasing your credit score further.
Here’s how you can get approved for a line of credit despite having bad credit:
- Know your credit score and work around it. Having an idea about your credit status allows you to explore the options available to you. Your credit score says a lot about your finances and speaks a lot about your credit and repayment abilities. Bad credit covers the FICO ranges of fair to very poor. Most bad credit loans can cater to scores as low as 550, but these often carry with them higher interests since lenders want some compensation from lending someone with a bad credit score. Assess how bad your credit score is and then see if it can qualify for a loan or if you can find other means of obtaining a line of credit despite your score.
- Explore options available for bad credit. There are several options you can explore for financing despite a low credit score, a line of credit being the more suitable for its revolving feature. A line of credit whether personal, home equity or for business is a favorable option for those with bad credit as it, as previously mentioned, allows you to access funds as needed for expenses that may have unpredictable costs. This type of loan also provides you with a certain amount of flexibility with regards to the amount you can use and terms of repayment as it only compounds interest to the money you actually spend. Although a line of credit for bad credit may have variable fees, these can be lessened when you have several properties you can put up as guarantees.
- Use assets to obtain a line of credit. Use property as collateral to secure a loan and benefit from lower rates accorded by the lender, but make sure to pay on time so as not to lose further assets. A collateral, such as in the case of your home in exchange for a home equity line of credit, can serve as guarantee and qualify you for lower interest. However, putting up an asset as collateral takes on the added risk that you might lose your property in case you default.
- Once approved, comply with repayment schedules. Getting approved is one thing, but paying off the loan is another. You have to make sure to settle payments based on the terms and schedules set so as not to endanger your loan, your collateral, and credit score further. Most lines of credit for bad credit have amenable payment terms that consider your situation, so it’s best to make the most of it. Make loan payments a priority in your monthly budget and make necessary sacrifices so you have the amount needed for the scheduled repayment. Paying on time also allows you to stretch your credit limit further, giving you access to additional funds in the future. Regular and up-to-date payments not only lessen the amount you owe but can also impact your standing in the long run as it can improve your credit history and consequently upgrade your credit score.
In summary, having bad credit can have a negative impact in securing additional loans, especially when banks and other financial institutions rely on this metric for loan approval. But obtaining a loan is possible despite having bad credit. A line of credit can be seen as a viable option, as it provides you with funds that can be accessed as needed and fund expenses with unpredictable costs over time.
Navigating financial difficulties with bad credit can be a challenge, but knowing your credit score and exhausting available options can yield to a suitable loan. In addition, opening a line of credit, whether secured or unsecured, a business line of credit or HELOC, can provide better alternatives. Utilizing your home and other valuable property as collaterals can lessen burdens posed by loan interests. Opening a line of credit can actually be beneficial to bad credit as it can even help boost credit scores and build positive credit history through calculated borrowing and diligent repayment.