Have you started reading this? So I guess you want to get a loan and your score is not that appealing.
Here you are, searching through the internet and worrying about how you’re going to get that loan. How to kickstart the process and finally get that money, hoping you can make it happen soon. Let me guess. Your credit score is not that high. Am I right? If the answer is yes, keep reading and you might find some interesting and useful things here.
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Credit score fundamentals
The score is a number which shows how trustworthy you are or can be with a loan. It indicates whether you will be able to make the payments on time or not.
It seems like 67% of Americans have their FICO score above the 670 mark. The higher the number, the easier it is to get a loan.
But today we are going to discuss how to get a loan if you are in the other 33% having a score lower then 670.
There are 5 different aspects to consider when calculating your credit score.
- Payment History: 35% of the overall score is your payment history, where they look if you make your payments on time.
- Current Debt: 30% of the score is whether or not you have current loans or debt.
- Credit history length: 15% of it is about your credit history length. If you have a long credit history, and you’ve made all your payments on time, your score will get better.
- Multiple accounts: The more credit account types you have, the higher your score. This takes 10% of the score, and it shows that you can responsibly manage all the accounts and pay them back on time.
- Recent activity: And the last 10% of your score is the latest credit activity. We’ve mentioned that many different account types are good for the score. But if your activity history shows that you’ve opened many accounts recently, it might affect your score adversely. However, if you have many accounts for a long time and you make your payments on time, it will help increase your score.
You are not the only one
If you are thinking that your score is too low (given that it is somewhere around 600) and you won’t ever get a loan with that score, then you are mistaken. Yes, credit scores below 670 are relatively low, and it is not that easy to get a loan with that score as it is with a higher one. But that doesn’t mean that there is nothing you can do about it.
You need to understand that you are not the only one with a similar score. Approximately 15% of the American population is in a similar situation, which makes nearly 56 million of you. So there are ways to get a loan with that score. According to Nick Clements from MagnifyMoney, even if you have a bad credit score, there is a 68.84% chance that you will pay back your lown.
It means that the institutions that land money understand that there is almost 69% chance you will pay them back. However, they can’t be entirely sure about it if they don’t see it. So instead of worrying about the score you have now, you can work on improving it.
How to get a loan with a bad credit score?
To make it easier to explain, let me bring an example. Let’s say you want to buy a car but, at the moment, you don’t have enough money to make the full payment in cash.
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- Estimation: It is crucial to understand and correctly estimate the realistic monthly amount that you can pay. Sometimes people get so caught up in the idea of buying a nice car that they overestimate their finances and they end up in debt. This is not only bad for you in the current situation, but it also has negative effects on your credit score.
- Show them you can be trusted: Another one of the most important things you will need to do to be able to get approved for a loan is to show them you are trustworthy. You need to show them that even if your score is still bad, they have absolutely nothing to worry about, as there is nothing fishy about you and your documents. Before submitting your request for the loan, find out what documents they need you to submit. Make sure there are no mistakes in those documents. Let’s say you’ve moved a week ago to a new address, but you still have your old address on your driver’s license. That might be a red flag. Before submitting anything read the requirements for the loan request very carefully to be able to present yourself most favorably. To avoid undesirable situations, make sure all your documents are updated and presented properly.
- Leave a downpayment: When you are planning to take a loan to buy something, let’s say a car, having an amount ready for a downpayment will put you in an advantageous position. The more the downpayment, the more likely it is to get the loan. One reason for this is that when you give a bigger downpayment, you lower the amount you need for the loan, which makes it more probable for your loan to be approved.
- Get a pre-approval: Pre-approvals are for the lenders to understand what amount of money you can spend to be able to pay it back. They check your credit history and income sources. If you don’t have much credit history, they will have to mostly rely on your proof of income sources. To get a pre-approval, go to your local bank or credit union to request it. If they don’t start the pre-approval process with you, ask the seller of the car, the house, or whatever you want to buy to help you find a place where you can get pre-approved.
- You might need to sacrifice some features: When you are looking for a loan but you have a bad credit score, it is not very likely to get big about of money at once. If you want to get the loan at any cost, it would be reasonable to cut the extras. Maybe there are some features of the car that you can sacrifice and get the car at a lower price, or maybe you could decide on buying a smaller house instead of the bigger one you want, thus decreasing the amount of the loan the lenders will have to trust you with.
- Ask for reconsideration: If you didn’t have much success the first time, it might be a good idea to ask for reconsideration. You may think that it is no use, as looking at the same papers for the second time isn’t going to change their mind. But, you never know. However, requesting a reconsideration doesn’t necessarily mean asking the lender to go over the same papers again. To get a reconsideration you will need to bring solid arguments to show them why you would be a great and trustworthy borrower. Do you have a high income and you could afford it for the next few months (years)? Or any other reason to make the lender believe that they can trust you.
- Involve a cosigner: Let’s say you’ve tried many things, even reconsideration, and you are still not able to get a loan. This is where you should think of finding a cosigner to join you. A cosigner is one of your friends, family members, or someone else who’s very close to you. S(he) agrees to cosign with you on a loan showing the lender that, in case you are not able to pay the loan back on time, they will be there to help you and fulfill the lender’s requirements. The cosigner should be someone with a high credit score; otherwise, you will see no change in your credit application results.
- Be careful: Be careful with every credit you get: Read about all the requirements and conditions before getting into an agreement. Read all the fine print and make an informed decision. Always keep in mind that not everyone has your best interest in mind, so make sure you DON’T agree to take a loan that will drain your pockets.
- Family & Friends: In case you’ve been trying for long with no success, and you don’t have time for working on the improvement of your credit score, it is time to ask your friends or family for some help. Even if you are borrowing from your closest people, you need to be professional and follow the money lending and borrowing rules. This will not only keep things organized, but you will also make sure you don’t spoil your relationship with that person.
- Peer to peer lending: And finally, let’s say, for some reason even your friends and family members couldn’t lend you the credit. You can always take your request to private investors from online marketplaces. All you need to do here is to find a platform which brings lenders and borrowers together. Pay close attention to the terms and conditions of those platforms to choose what’s best for you.
Now, if you follow these few steps, you should have a better chance of getting a loan. However, that shouldn’t be enough. Let’s say this time you’ve got the loan, and you’ve bought whatever you wanted to.
What happens when you want to get another loan, and your score is still under the 670 or even 620 mark. Do you want to ignore the fact that you have a bad credit score hoping that you will get the second loan with that score in the future? Or you want to work on your credit score and make sure you improve it to make it easier for you to get a loan next time?
If, after all, you decide to improve your score, KEEP READING.
How to improve your credit score?
Credit scores are not an outcome of mysterious calculations. No one keeps it in secret, and if you want to improve your score, there are certain steps you can take to make that happen.
So now, let’s understand the “science” behind the credit scores. Once we understand that we can make it work to our advantage.
Build some credit history
When you are starting new, and you have never had credit before it is hard for anyone to trust you. If you think about that, it is reasonable. Would you trust your wallet to someone you’ve never met before? I hope the answer to that is “No”. Now, the same thing is with the loan. To prove that you can be trusted with a credit, you need to build some credit history.
There are different things people do to get some credit history on paper, but some of those techniques are not good enough and might even end up dragging your credit score down.
Here is what you can do.
Take a secured credit card
First, you go to any bank you want and get yourself a secured credit card. These credit cards have no annual fees. That’s how these work. Let’s say you go to the back to get a secured credit card of $200. While you do that you also leave a cash deposit of $200 with the bank and leave. If you start and continue making your credit payments on time and fully, after several months, when you cancel your secured credit card, the bank will give you your deposit back.
How to spend the money on your secured credit card
When you get a secured credit card, and your only purpose is to fix your credit history, you should also think about acting naturally and shouldn’t pay back the whole amount at once. Try to spend the money on random occasions, buying dinner for once or twice, at the gas stations, grocery stores, etc. And when the time comes, make sure you have enough money to pay back on time.
Take a non-secured credit card
Once you’ve mastered performing credit card activities with a secured credit card, it is time for you to go to the next level and try getting a non-secured credit card. If it’s been a few months you have your secured credit card (at least 4-5 months), and your score is high enough to qualify for an unsecured credit, it’s time to take it.
This time you go to a bank of your choice to get a unsecured credit card. For this one, you won’t need to leave a deposit as it is unsecured. Once you have a card, the process is the same. You make purchases and pay the amount back on time to show that you can be trusted.
Get another credit card/credit line
You might ask, “why do I need another credit card if I have one already”. The truth is, as we have already mentioned in the beginning, it is important to show that you can manage multiple credit accounts and still be on time with your payments and fully pay them.
But, make sure that everything you do feels natural. This means that when you get your first unsecured credit card, don’t rush into getting the second one too soon. Let it be there for at least 7-8 months before you take the second one.
Once you have 2 credit cards and have used it for another few months, you can go for another one. This doesn’t mean that you should get dozens of credit cards.
Monitor your credit score and see where it goes. If you see it’s getting higher, keep doing whatever you were doing to maintain your good score.
We hope that you will find this article helpful and you will be able to make informed decisions and the best choices.
Wish you the best of luck in improving your credit score as well as in future credit applications.
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