Your credit score is an important part of your financial life. This three-digit number, which is based on your credit history and credit report, influences many of the financial decisions you make, even if you don’t always realize it. But what happens if you have a less than ideal score?
A low credit score can be an obstacle when you’re trying to get a credit card or apply for a loan but it doesn’t automatically mean you’ll be denied. With the right tools and knowledge, it’s possible to put a positive spin on poor credit.
Quick tip: Make sure to check your free credit score on Credit Sesame.
What lenders check when you apply for a loan
No matter how bad your credit may be, lenders will still want to take a look at your credit history when you apply for a loan. That includes not only taking a peek at your credit report but your score as well. The purpose of checking your credit is to assess how fiscally responsible you are and whether you’ll be able to pay back the money you borrow.[Related: Understand Lender Credit Lingo & Jump to a Higher Credit Category]
So what about lenders that advertise loans with no credit check needed? While there may be some legit lenders out there who are willing to grant loans without looking at your credit, they’re the exception rather than the rule. In fact, these no credit check loans are usually scams 99% of the time. The following list outlines some major red flags the Federal Trade Commission says should alert you to loan scams.
You should avoid lenders who…
• Aren’t interested in your credit history or credit score
• Ask for advance fees (before you get the loan)
• Guarantee you a loan before any assessment has been done
• Pressure you to make a quick decision
• Ask for personal information over email or phone
• Ask you to wire them money immediately to an individual rather than a company
• Won’t provide you with their location or business connections
• Aren’t registered to work in your state
Generally, the only loans that you can get without a proper credit check are payday loans which tend to come with astronomically high interest rates. These kinds of loans are a slippery slope, however, which we’ll explain in a little more detail later on.
Now that you’ve learned the hard truth that there’s no getting around your credit when you need a loan, let’s look at the difference between fair credit scores and poor credit scores and how they affect your chances of getting approved.
Fair credit vs. poor credit
The gap between a poor credit score and fair credit score may not seem that wide but it can make a huge difference when it comes to loan approvals and interest rates. Generally, anything in the 650 to 699 range qualifies as fair credit while poor credit would be a score between 550 and 649. A few points’ difference in either direction can have serious implications when you’re borrowing money.
For example, let’s say you’re trying to buy a home and you need a mortgage for $200,000. Your credit score is 645, just a few points shy of putting you into “fair” territory. As a result, the lender offers you a 30-year loan at 5.5%, which means you’ll pay about $208,000 in interest by the time the home is paid off.
Now, if you’d had a score of 655, you’d be able to get the same loan at 4.9% instead. That adds up to a savings of roughly $22,000 in interest over the life of the loan, all for a difference in your score of just 10 points.
A fair credit score would make you eligible for a variety of loans and lines of credit, including:
• Mortgage loans
• Auto loans
• Credit cards with moderate interest rates and possibly a 0% intro rate
• Rewards cards with no annual fee
If you have poor credit, there are still credit loan options available but the downside is it may be more difficult and expensive to borrow money. For instance, you could still qualify for a mortgage or a car loan but you may not be able to borrow as much as someone with good credit. Lenders may cap your loan at a lower amount to minimize the risk.
You may also be required to put up larger down payments for things like mortgages or car loans or offer some kind of collateral for a personal loan. If your score is at the very bottom of the poor range or below the 550 mark, trying to get an unsecured loan may lead to a dead end.
Finally, and perhaps most importantly, you’ll pay more in interest for any loans you take out with a poor credit. Instead of locking in a 5% or 7% rate for a car loan, for example, you may be stuck paying 15% or even 20%. With a credit card, the rates can climb even higher. The most important thing to remember with poor credit is to be sure that you can afford the monthly payments so you don’t run the risk of your derailing yourself financially.
Getting a loan with bad credit
If you need extra cash a loan can be a lifesaver but if you have bad credit, your options may be limited. Here’s a look at some different ways you can borrow when your credit score is struggling to make it into the poor range.
If you have bad credit of 550 or below and you need money fast, you may be tempted to get a cash advance or payday loan. The basic premise of these loans is you get the cash you need until your next paycheck. You provide information about your job and income, along with a post-dated check to cover the loan amount plus a finance fee. When you get your paycheck, you’re expected to pay the loan in full.
While these loans are convenient they’re extremely risky and can cost you much more than the initial amount you borrow. According to the Consumer Financial Protection Bureau, the average finance charge for every $100 borrowed on a payday loan is $10-30. For a typical 2-week payday loan with a $15 fee that’s the equivalent of paying an annual percentage rate (APR) of almost 400%. When compared to credit card APR’s that range from 12-30%, it’s easy to see what a money drain payday loans are.
The other big problem with payday loans is that the interest and fees make them difficult to get rid of. If you can’t pay the loan off entirely you’ll be charged more fees and as they keep piling up, it gets harder and harder to dig your way out. The main lesson is that payday loans are something you don’t want to turn to unless you absolutely have no other option for borrowing money because they can end up being far more trouble than they’re worth.
As an alternative to payday loans, some financial experts recommend looking into short term loans for bad credit instead. These loans have a fixed interest rate and repayment plan so you have a more flexible time frame for paying them off. While this makes it easier to keep tabs on what you owe, lenders will run a credit check for these kinds of loans. If you’re shopping around for a short-term loan, keep new applications to a minimum since multiple inquiries can ding your score even further.
If you want to try for a personal loan, your local credit union is a great place to start since they tend to be more lenient in terms of making loans to bad credit borrowers. If you can’t get a personal loan, you may qualify for an installment loan or line of credit.
Getting a personal loan from a bank is also a possibility and unlike a mortgage or car loan, you can use the cash for whatever you like as long as you’re approved. If you need extra cash is to make a major purchase, a bank loan is a better idea than racking up credit card debt because the interest rate on the loan will likely be lower.
Taking out a cash advance from a credit card is another option but be aware that you’ll pay a lot more to get money this way. That’s because credit card companies routinely charge a fee equal to 3% of the advance amount and apply interest rates of 24% to 29% to the balance.
Student loans and bad credit
Student loans can help you cover the gap when you don’t have enough cash to cover tuition and books but it can be difficult to get approval from a private lender if you have bad credit. Most private student loan lenders have strict underwriting guidelines and if you don’t meet their minimum credit standards, you’ll need to bring in a co-signer to qualify.
Federal student loans don’t come with any restrictions on credit and they tend to have lower interest rates than private loans. The only downside is that there are limits on how much you can borrow each year so if you’re attending a pricey private university or earning a graduate degree, they may not be enough to cover the full cost of college.
As with anything credit related, student loans can be tricky. Lenders tailor these loans to students so they have lower interest rates and more flexible repayment terms. But because the amount borrowed is usually high, in the 5 figure range, it takes a long time to pay them off if you only pay the monthly minimum and interest can accrue quickly. Knowing this beforehand can help you better map out your financial future.
Mortgage loans and bad credit
Buying a home with bad credit may seem daunting but it’s not entirely out of the question. While you’re obviously not going to get the best rates on a loan, it’s still possible to make your dreams of owning a home a reality. There are a few different routes you can take as a home-buyer with bad credit.
Adjustable rate mortgage (ARM)
Mortgages with adjustable rates are easier to get approved for if you have poor credit and they allow you a smaller down payment price. Be aware though that these loans do carry a higher risk as their interest rates will fluctuate with market conditions. If interest rates are higher when the ARM resets, you could be looking at much higher rate. If your credit hasn’t improved enough to refinance to a conventional loan, your home could end up being a money pit.
The Federal Housing Administration offers a loan program for borrowers with less than perfect credit who don’t have the standard 20% to put down. These loans are backed by the government which allows lenders to offer competitive interest rates to applicants who don’t have the best scores. Currently, the minimum score required by the FHA is 580, although individual lenders may set the bar higher.
As far as the down payment goes, you’ll need to have 3.5% of the home’s purchase price to seal the deal. If you’re able to get approved with a score below 580, you’ll need to put 10% down instead. One thing to remember with FHA loans is that you have to pay both an upfront mortgage insurance premium and an annual mortgage insurance premium for the life of the loan.
VA and USDA loans
Another great low down payment option mortgage loan is a VA loan. You’ll typically need a credit score of at least a 620 in order to qualify for a VA loan, in addition to having military affiliation (active duty, veteran, guard member, reserve, and sometimes spouses). On the upside, you won’t have to pay for mortgage insurance with a VA loan. On the down side, you will usually be charged a funding fee in relation to your down payment with a VA loan.
USDA loans also have less stringent requirements for down payments and credit scores. The minimum credit score for approval is 620 and you don’t have to put anything down if you don’t want to. To get a USDA loan, the home you’re buying has to be in a designated rural area and you have to be below the income limits specified for your state and household size. Only fixed-rate loans are available through the USDA program.
Finding bad credit loans online
If you’re looking for a loan online, it can be hard to weed through internet search results and reviews to find a company that you can trust, much less a loan that fits your needs. That’s where Credit Sesame’s tools and resources come in handy.
The Credit Sesame mortgage comparison tool, for example, allows you to instantly analyze current mortgage rates and visually compare the top loan offers personalized to your needs. This and the other tools Credit Sesame offers are a great place to start if you don’t know where to begin, and they’ll lead you on the right path towards making a more informed financial decision the next time you need a loan.