How can you access finance with bad credit?

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Generally speaking, the higher your credit score, the better your chances are at being approved for a loan; however, that is not to say that you cannot get a loan if you have a poor credit score. We share the top tips of securing a loan even if you have bad credit.

What is considered bad credit? 

Your credit score is made up of many different factors including the length of your credit report, repayment history and credit utilisation ratio, among other things. The number is an expression of an individual’s creditworthiness and demonstrates to lenders whether or not you are a reliable borrower. Thus, the higher your credit score, the more likely you are to be able to meet loan repayments on time.

A credit score is a number which represents a person’s financial history taking into account any money they may have borrowed in the past. If you have a higher credit score, this is indicative that you are more of a reliable borrower who can meet repayments.

If people have a “bad” score (a score of below 650), it might be because they have little to no credit history, they have missed loan or credit repayments in the past or they have previously been rejected for loans.

What factors should you consider if your credit is below 650?

Just because your credit score is low does not mean you should be deterred from applying for a loan. However, there are certain things to take into account.

Shop around before taking out a loan 

Regardless of your credit score, you should always take your time before making a decision about which loan to apply for. Loan applications and rejections are recorded on your credit history and can negatively impact your credit score so it is important that you are applying for a loan where your chances of success are higher. For example, do not waste your time applying for lenders where you do not meet the eligibility criteria.

When comparing loans, look at the APR and additional fees to determine which has the best rate. Always read the terms and conditions carefully to make sure you understand how the loan works and avoid getting caught out.

Consider how much money you want to take out and what your ideal repayment term would look like. This will help you calculate how much the loan will cost you over a long term basis.

Beware of predatory lending

If you have bad credit, you may be subject to predatory lending. This is the practice of targeting people who are financially down on their luck and trapping them in a perpetual cycle of debt where they are constantly paying sky-high interest rates. Any lenders who advertise to bad credit borrowers or who do not run strict credit checks could be charging APR rates which are impossible to pay back. Before applying for a loan with these lenders, you should always consider alternative options.

How can you improve your credit before applying for a loan?

Although it is not impossible to take out a loan if you have poor credit, your chances of approval are typically lower and you may be subject to less favorable conditions such as very high APR. Subsequently, it might be worth improving your credit score as much as possible in order to maximise your chances of loan approval. Being approved at better rates will save you money in the long run.

There are many things you can do to improve your credit score including joining the electoral register, paying off existing debt and checking for errors on your credit report. Getting into a habit of regular, timely repayments will help you build credit over a long term basis.

Creating and following a budget will also positively boost your credit score. Not only will it help you to manage your finances and save money, it will also work to keep your credit utilisation ratio low. This is the ratio of how much of your available credit you are spending versus how much credit you have available. Financial experts keep this value at 30% or lower in order to positively impact your credit score.

The sooner you start to build positive credit, the better. In fact, the longer your credit report, the more favorably lenders will look upon applications as longer credit history usually means a better credit score.

Should I get a co-signer if I have bad credit?

If you have bad credit, you may benefit from seeking out a co-signer when applying for a loan. Applying for a loan along with someone who has a good or excellent credit score could increase your chances of approval as it is less risky for lenders. 

When you cosign for a loan, it means that the second party is also accepting responsibility for the loan. This means that should you default on any repayments, the co-signer is agreeing to pay on your behalf. The better the credit score of the co-signer, the better your chances of approval as it is more security for the lenders. This means that you could also benefit from better loan terms such as better interest rates.

Before choosing this route, make sure that the lender who you are approaching allows you to sign with a co-signer and if there are any specific terms and conditions.

Co-signers will need to demonstrate to lenders that they are financially stable and will be expected to share certain personal information such as pay stubs and bank statements.

Interesting Related Article: “5 Tips for Those with Bad Credit