First, what is exactly is a bad credit score? Depending on your needs and financial aspirations, it could mean anything from below 550 up to 700 if you are aiming for a great rate. The downside of a lower score translates in additional payment burden, as you can expect an interest rate of 5-12% for a mortgage, 10-20% for car loans and 15-75% for credit cards. Furthermore, you are also in the range where you seem like a perfect target for predatory loan givers.
Solutions by Loan Type
Depending on your final goals of spending the money you take as a loan there are different strategies to make it happen, ranging from short-term high-interest loans to getting a co-signer or just lending from family and friends.
Short term loans, under $25.000
If you need just resources to cover some unplanned spending like out of pocket healthcare costs, financing a wedding, a vacation or making a major repair in your home, but your credit score does not recommend you to be a money-wise person, there are a few alternatives.
Get a loan from the Credit Union. If you have a profession that has unions, maybe you could get a better rate at an office of your chosen union. Usually, these loans are among the most competitive and take a personal approach to lending. If you have been a member of a union for a long time, why not ask them first, before going to a bank. If you are just starting, look at the list provided by the National Credit Union Administration and pick a suitable union. The downside is that usually amounts are limited to about $10.000.
Use your home equity. This method is only recommended to those with strong budgeting skills and who can make Swiss clock repayments. Otherwise, you could put in danger the ownership of your family’s home. If you are below 650, this should not be your first option, but above 700 it could get you rates as good as those in the 740-850 bracket.
Using non-standard financial institutions like peer-to-peer lending (social lending) can give a person with lower FICO score a better chance of getting the money they need from a private investor. Rates are usually higher than a traditional financial institution, but should under no circumstance go more than 35%, or you are entering the territory of predatory sharks. Such a loan is a contract through an online platform where individual investors offer you their terms, which you can accept or not. A good rule of thumb is that an acceptable rate is about 25% higher than what you would get at a bank since you are considered a risky investment.
Get a co-signer to back you up in front of the lender. This is a high-risk move, especially for the person who agrees to the position. If your default, your co-signer will have to pay and the delays will appear on both of your credit scores. The good news is that if you have a diligent co-signer that you do not want to disappoint this can keep you on track with money. Let them see and negotiate the terms of the loan.
Borrow from family or friends. They will not ask you about your FICO score, but most likely it can spell disaster for your social life if you default payments. The amounts you can borrow are also small, but it can be an option especially when you are below 550 and want to save some money.
Avoid loan sharks. Do your homework and put on paper just how much you should pay, compute the total value of the loan. Most predatory loans have interest rates as high as 300% per year, but the advertisement usually displays the amount you should pay per week or per day. This should be a red flag right there. If the bank computes the amount per year, why would another institution go so in depth? Also, asking for no documents, giving you money just because you are alive is another sign that something is not right.
Mortgage Loan with Bad Credit Score
Getting a home when you are an ambulant risk for your creditors is hard, to say the least. We are not talking here about $1000-$10.000 for at most five years; this is a real commitment. If you are a big spender with an expensive hobby or a shoe addiction, don’t hope for any forgiveness and start working on increasing your score before taking any other steps. Shopping around for loans when you have no chance will only hurt your rating more.
Explain the credit score. If you are new to credit cards or you never borrowed before the bank will have no yardstick to measure your financial diligence. Try to come to terms with the lender and provide other ways of verifying your trustworthiness and ability to manage finances.
Proof of payment history. When you cannot rely on traditional methods of fiscal solvency you need to get creative. Ask for payment proof from your landlord, bring utility invoices, telephone bills or anything that could show that you do not like being late with your payments. This is no guarantee, but it can make a difference if your automatically rejected credit is being reconsidered by an underwriter.
Proof of owning cash. Having cash when you think about buying a home is a no-brainer. The money should be divided into two piles: the down payment of about 20% and survival money for at least six months, including the rate. The deposit can give the lender peace of mind regarding your ability to support payments even if you lose your job.
Although these strategies might get you a mortgage, that is only the first step of the long way. If you do get approved, don’t take it lightly and strive to follow a budget so that by repaying your loan you also build good credit history. Chances are the rate you get when you have a low score in not the best deal compared to what you get in 5-10 years. Therefore, use this as a “probation period,” to show that you can be trusted. Once you get your score past the 740 limit, shop around to refinance the remaining part of the loan at a better rate.
Having a good score is important not only for mortgages and other loans but also if you want to get a better job, buy a franchise or start your own business. Even getting the next iPhone or a deal for car insurance are out of reach if you are not wise with finances.