If you have bad credit, it can be hard to get loans for big purchases or even just the things you need every day. But a loan for bad credit can be a very helpful tool as you work to improve your credit score. This article will talk about how a bad credit loan can help your credit score, as well as the pros and cons of this option and give you advice on how to best utilise it.
How to Understand Bad Credit
You need to know what bad credit is and why it matters before you can talk about how a loan for bad credit can help. A credit score below 580 on the FICO scale is generally what is meant by “bad credit.” This score can be caused by many things, like missing payments, having a lot of debt, or even mistakes on your credit record. Lenders see people with low credit scores as more of a risk, which can make it hard to get loans, credit cards, or even rental deals.
How do I get a loan if I have bad credit?
A personal loan for bad credit is a type of loan that is made just for people with bad credit. Most of the time, these loans have higher fees and interest rates because lenders are taking on more risk. But they give people a chance to get money they might not have been able to get otherwise and, more importantly, a chance to raise their credit score.
How a loan for bad credit can help your credit score
1. Building a good history of payments
Your payment history makes up 35% of your FICO score and is one of the most important parts of your credit score. You can start to build a good payment history by getting a loan even though you have bad credit and paying it back on time. Each payment you make on time is reported to the credit companies, which raises your credit score over time. Over time, this pattern of behaviour shows lenders that you are a trustworthy user, which can help you get better credit in the future.
2. Making your credit mix more diverse
10% of your credit score is based on your credit mix, which is the different types of credit you have. Your credit score can go up if you have a variety of credit accounts, like store accounts, installment loans, and credit cards. It’s possible to get a loan even if you have bad credit if you mostly have open credit accounts, like credit cards. Having a variety of credit types shows that you can handle them properly, which can help your credit score.
3. Lowering the amount of credit you use
Your credit utilisation ratio, which is the difference between how much open credit you’re using and how much credit you have available, is another important part of your credit score. It makes up 30% of your FICO score. If you have big balances or credit cards that are maxed out, it can hurt your score. You can lower your credit utilisation ratio by getting a loan even if you have bad credit. This will help you pay off some of your continuous debt. Getting this number lower can help your credit score because it shows that you don’t depend on credit too much.
4. A chance to settle outstanding debts
A bad credit score can happen if you owe money and have bills sent to collections. A loan for bad credit can help you get the money you need to pay off your bills in this case. As the bad effects of these collections accounts wear off over time, you may see an increase in your credit score once you pay off these amounts. Getting these bills paid off can also keep your credit score from dropping even more.
5. Fixing Your Credit After Bankruptcy
Your credit score is probably the lowest it has ever been if you have recently filed for bankruptcy. After a big financial loss, getting a loan for bad credit can be one of the first things you do to rebuild your credit. Even if the interest rates are high, showing that you can properly handle new debt can help to improve your credit score over time. It will take some time, but you can fix your credit and even make it better if you are patient and follow through.
Things to think about before getting a loan with bad credit
A loan for bad credit can help you improve your credit, but you should be aware of the risks:
1. Rates of interest too high
Lenders see people with bad credit as a bigger risk, so interest rates on loans for bad credit are usually very high. This means you’ll have to pay more over the course of the loan, which can be hard on your funds if you aren’t careful.
2. The chance of getting more debt
Getting a loan even though you have bad credit could put you in more debt if you are not careful. If you take out more loans than you can pay back, you could get stuck in a circle of debt that is hard to get out of. It’s important to only borrow what you need and have a sound plan for paying it back.
3. Snake oil sales and predatory lenders
There are, unfortunately, a lot of dishonest lenders who take advantage of people with bad credit by giving them loans with unfair terms or secret fees. It’s important to do a lot of study on lenders, read the small print, and be wary of deals that seem too good to be true.
How to Get a Loan Even If You Have Bad Credit
Here are some things you can do to get the most out of a loan for bad credit and improve your credit score:
1. Only borrow what you need
When you get accepted for a bigger loan, it can be tempting to borrow more than you need. But it’s smart to only take what you need and what you can easily pay back. This method keeps your bills manageable and keeps you from taking on too much debt.
2. Pay your bills on time
To improve your credit score, you must make payments on time. You will never miss a due date if you set up automatic payments or alerts. Every payment you make on time helps your credit score.
3. Keep an eye on your credit score
Check your credit record and credit score often to see how things are going. You can see how your hard work is paying off and find any mistakes or problems that could hurt your credit by checking your score often.
4. Give More Than the Least
Try to make more than the minimum amount every month if you can. When you pay more, the debt goes down faster. This can help you pay off the loan faster and save you money on interest.
5. Don’t apply for more than one loan at a time.
A hard search is made on your credit report every time you apply for credit. This can temporarily lower your score. Don’t ask for a lot of loans or credit cards at once, because lenders might think you’re having money problems.
Other Choices Besides Getting a Loan If You Have Bad Credit
If you’re not sure if a loan for bad credit is right for you, here are some other ways you can improve your credit score:
1. Credit cards with security
With bad credit, it’s easier to get a secured credit card because you have to put down cash as protection. If you use a protected card wisely, it can help you build credit without the risks of a high-interest loan.
2. Help with credit
A credit counsellor can help you figure out how to get your debts paid off and your credit score raised. Credit counselling services can also talk to your creditors on your behalf and try to get your interest rates or monthly payments lowered.
3. Plans for dealing with debt
Working with a credit counselling service to combine all of your bills into one monthly payment is what a debt management plan (DMP) is all about. A DMP won’t directly raise your credit score, but it can help you handle your debt better and keep your credit score from dropping even more.
In conclusion
A loan for bad credit can help you rebuild your credit score if you know how to use it right. You can make big steps towards improving your credit score by making on-time payments, getting different types of credit, and lowering your credit utilisation ratio. It’s important to be aware of the risks, though, like high interest rates and the chance of taking on more debt. You can use a loan for bad credit to improve your credit score and get your finances in better shape by borrowing money wisely, paying it back on time, and looking into other choices.