Can I Get Credit With a Bad Credit Score?

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After being laid off and struggling financially, a Credit Sesame reader writes in for advice on getting credit and qualifying for a loan with a bad credit rating. John Ulzheimer, credit expert for Credit Sesame, answers.

“John, I’m recovering from a layoff four years ago and my credit took a pretty big hit when I had to default on a couple of credit cards and my mortgage loan. My credit score according to Credit Sesame was around 560 and has since improved to about 623. The problem I’m facing is that I need a different car because I drive about 30 miles to work every day and my old clunker is about to die. I know it isn’t the best time to apply for a car loan, especially given my less than perfect credit, but I have no choice. Do I stand a chance at getting credit with my bad credit score?

The short answer to your question is yes, you absolutely stand a chance at getting a car loan with your bad credit score. And while your 623 is considerably below the national average credit score, it’s not as bad as it could be. Let’s consider the three most popular loan and credit products, and your realistic options at being approved with bad credit scores.

Auto Loans for Bad Credit

Clearly you’re looking for an auto loan. You’re in luck as auto loans are still plentiful even for people with bad, and even horrible, credit scores. In fact, auto loans were the only loans that never dried up during the recent economic meltdown. At 623 the national average interest rate for a 60-month loan for a new car is a little over 10 percent according to Informa Research, a company that tracks rates by credit scores. You could even have a credit score in the low 500s and still qualify for a loan, albeit at over 16 percent. You may even be able to qualify for a lower rate if you’re willing and able to make a large down payment.

Credit Cards for Bad Credit

Credit cards are plentiful even for people who have poor credit scores. Most of the mainstream credit card issuers have subprime options that allow people with damaged credit to be approved. You’ll be paying north of 25 percent interest if you carry a balance so your options are going to be expensive. And, if you choose to do business with the true subprime credit card issuer then you’ll also find yourself paying annual fees and other types of fees.

Mortgage Loans for Bad Credit

I love reading articles about how “these days” you can’t get a mortgage loan unless you have nearly perfect credit and a 20 percent down payment. There was even a high profile story last October about how the former Federal Reserve Chairman was denied a loan to refinance his home loan, although he never disclosed exactly why he was denied or whether or not his credit scores or unemployed status was a reason for the bank’s adverse decision. Let’s just say the reports of the mortgage market being dry except for the borrowing elite have been horribly exaggerated.

If you talk to any mortgage broker they’ll tell you that while the process is easier if you have good credit and financials, there are still options for those with less than stellar credit report summaries and scores. In fact, as long as your credit scores are at least 620 and you don’t have a foreclosure on your credit reports in your recent past, then you’ve got a shot at qualifying. You’ll have to have a sufficient income to do so, but that’s a reasonable requirement.

At 620 you’ll pay a shade over five percent in interest on a 30-year fixed rate mortgage, which isn’t half bad considering five percent was pretty much the best deal going just five short years ago. For those of you who took out mortgage loans in 2007, you only wish you could have qualified for a loan at five percent interest. The best deal in 2007 was closer to seven percent. Point being, today’s “bad” interest rates aren’t as bad as they may seem, historically.

Certainly yes, if you had better credit you could qualify for rates below 3.5 percent on a mortgage. And while that’s only about 150 basis points better than the worst deal, when you apply that to hundreds of thousands of borrowed dollars it starts to add up. But for people to suggest that you have no options, for any form of credit, with poor credit is simply untrue.

More on Credit Scores from Credit Expert, John Ulzheimer:

How to Improve a Poor Credit Score

5 Secrets to Earning Great Credit Scores

What’s More Important Than Your Credit Score? The Factors Behind It

John Ulzheimer
John Ulzheimer, Credit Expert for Credit Sesame, is a nationally recognized expert on credit reporting, credit scoring and identity theft. He is twice FCRA certified by the credit industry’s trade association and has been an expert witness in over 170 credit related cases to date. Since 2004 John has been interviewed and published over 3,000 times on the topics of personal finance and consumer credit.

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