How To Build Credit?

Does your poor credit score keep you from acquiring loans? Here’s how you can improve your rating and build credit.

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Having a bad credit rating can really take a toll on your overall reputation, and cause you a lot of consequences in the near future. When you have a financial emergency and you’d want banks or credit unions to lend you a loan, your application could be rejected based on your credit score.

This is how dangerous a bad credit rating is. Let’s get into details.

Credit Scores

Credit scores are a numeric rating that is given to people to measure their creditworthiness. Higher the credit score, higher the chance of you acquiring the loan. A high credit score tells the lender that the borrower is prompt in paying back all due payment- and this is a big relief for a personal lending out money.

Importance of a High Credit Score

There are a few motivations to pursue a high FICO rating, and every one of them include saving money:

Score lower rates on auto loans: Unless you have enough money to purchase a vehicle outright, you’ll probably need to get an automobile advance. Having a good credit score can help you secure a loan with the best possible terms. Customers with the most noteworthy credit scores meet all requirements for a normal loan cost of 4.2% on another car, contrasted and 14.97% for individuals with the least FICO ratings, as indicated by Experian information.

Get credit cards with great rewards: You can fit the bill for a credit card with pretty much any sort of credit. Yet, the best credit cards regarding prizes and advantages commonly expect great to outstanding credit scores.

Qualify for the lowest rate on a mortgage: Given the measure of cash included, your home loan is the credit you’ll need to get the least financing cost conceivable on. It merits placing in the additional work to search around and arrange, as even a little rate increment can cost you a huge number of dollars over the life of your mortgage. Preparing your credit for a home loan is a basic advance in the home buying cycle.

Negotiate lower interest rates on your credit cards: If you totally take care of your credit card balance every month, your credit APR is insignificant. Yut if you’re carrying a balance, having a great credit score could help your negotiations with your lender to lower your interest rate. Getting a lower interest rate could spare you a great deal of cash.

Improved insurance rates: If you’re looking for mortgage holders or accident coverage rates, having an incredible FICO rating may assist you with fitting the bill for a lower month to month premium- except in certain states where the practice is banned.

Refinance your loans to save money: If you’ve improved your FICO rating since you opened one of your credit accounts, you might have the option to renegotiate it at a lower rate and save cash.

FICO Score Rating Description
<580 Poor People with scores in this range are considered at high risk of delinquency.
580 – 669 Fair People with scores in this range may have a hard time getting credit. If approved, they’ll typically pay a higher interest rate than those with better credit.
670 – 739 Good People with scores in this range are considered acceptable, but they may not receive interest rates as low as those with scores in the higher ranges.
740 – 799 Very Good People with scores in this range are likely to have their credit requests approved and be offered lower interest rates.
800+ Exceptional People with scores in this range usually have no problem getting credit.

Is it possible to get a 850 Credit Score?

Where a perfect 850 FICO credit score may seem impossible and a myth, the truth is there are some people in the United States with a perfect 850 credit score. In fact, these people make up 1.2% of the American population! So the first myth is busted: having a perfect score of 850 IS possible.

If it is possible, is it necessary? Absolutely not.

You can have a decent credit score and an excellent reputation without hitting 850- in fact, a score that is 740+ is also a good fit. For insurance companies that are credit based, a good credit score can give you a reasonable premiums deal- meaning a better credit score will get you less monthly premiums to pay.

If you really want to get a perfect score of 850, here’s how you can do so:

The first step is utilization, if you’re someone who waits until the end of the month or when the statement closes to pay off your debt, you could unconsciously be affecting your credit score. A good way to lower utilization without changing your spending habits is to pay off your balance before the statement closes.

Moreover, if it is possible, make a budget sheet of all your expenses. You will be able to determine which of these you can easily cut back on and which ones aren’t too necessary- this way you will take less credit because you would have already cut your unnecessary expenses.

Your payment history is very important while determining the credit score, and the formula is simple: pay off all your credit before the due date. As long as you’re paying off the minimum amount on your credit, you’re set. Even if you miss one payment, you’re suddenly a notch down on your credit history.

The problem with having only one credit card is that missing one payment makes your credit score ‘poor’. For example, 23 on time payments/24 total payments = 96% (Very poor). This means that a mistake you made two years ago is going to impact you today if you have one card.

How to build Credit?

If you have a poor credit score, you may be in a major fix financially. But there are certain ways to improve your credit score and build credit. The situation is clear: even a single late payment will affect your credit score. So how do you recover from a bad credit score? There are ways to improve your credit score.

Pay your Credit Card balance in full

A credit card is a handy and convenient way of a loan that literally lives in your wallet. While your debit card holds the balance of your bank account, a credit card is money offered to you as a loan in your card; there is of course a credit limit too.

Over the course of the month, you may choose to spend that credit limit on your expenses like rent, utilities and even entertainment. When the month ends, or the credit limit ends, you have to pay the principal amount of the credit you used along with the interest rate. A credit card is basically your cycle of debt; you pay one credit so you can get it again for the next month.

If you can’t pay the amount one month, the interest amount is piled up and when it is time to pay, you’re actually under a lot of debt. With credit cards, people often forget to pay the amount, but the interest keeps adding up making it a vicious cycle of debt.

Even if you’re not a high-risk borrower on your own fault, there are chances that you default on the loan because of higher interest rates. Here’s how you can avoid getting to that stage of default:

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  • Budget your income to include the potential loan payment.
  • Check your credit score and fix errors in your credit history.
  • Make timely payments each month to improve your credit rating.
  • Shop around for alternative lenders.
  • Consider asking someone with strong credit and income to cosign on the loan.
  • Set a reminder at least 3-4 days prior to the due date so that you don’t forget paying, and if you’re short of money, you have time to ask from your friends or family.

Types of Bad Credit Loans

  • Secured and unsecured personal loans: a secured loan is where you need some sort of collateral to ‘secure’ the loan; this could be a house, car or any of your assets. An unsecured loan doesn’t require any collateral, so the interest rate charged is also very high.
  • Payday loans: short-term loans given out as emergencies. The limit can be anywhere from $100 to $500.
  • Subprime loans: usually associated with auto loans; if a person is rejected from banks or credit unions based on their poor credit, such people usually qualify for subprime loans.
  • Cash advances: this is also a short term loan that is disbursed as cash and is borrowed against your credit card’s available loan.
  • Home equity loans for poor credit: these disburse a lump-sum money upfront and you have to pay in installments. However this type of loan uses your house as collateral, so if you fail to pay the loan, the lender is well within his rights to claim a portion of your house.
  • HELOCs for poor credit: these loans work like a credit card, meaning you’re allowed to borrow as much as you like.

Bad Credit Loan Rates

Here are some of the rates for guaranteed loan approval no credit check direct lender.

LENDER BEST FOR: MIN. CREDIT SCORE EST. APR MIN. LOAN AMOUNT MAX. LOAN AMOUNT
Bad Credit Loans Poor credit scores Not specified 5.99%–35.99% Not specified $10,000
Upstart Limited credit history 600 8.69%–35.99% $1,000 $50,000
OneMain Financial Secured loans Not specified 18.00%–35.99% $1,500 $20,000
TD Bank Personal Secured Loan Credit building Not specified Starting at 5.67% $5,000 $50,000
Avant Unsecured loans 580* 9.95%–35.99% $2,000 $35,000
LendingPoint Flexible repayment options 585 9.99%–35.99% $2,000 $25,000
Upgrade Fast funding 620 7.99%–35.97% (with autopay) $1,000 $35,000
LendingClub Online experience 600 10.68%–35.89% $1,000 $40,000

 

Note: Sample rates have been extracted online, courtesy of BankRate.

The estimated APR according to FICO score range is as follows:

CATEGORY CREDIT SCORE PERCENTAGE OF PEOPLE IN THIS CATEGORY ESTIMATED APR
Excellent 800–850 21% 10.3%–12.5%
Very good 740–799 25% 10.3%–12.5%
Good 670–739 21% 13.5%–15.5%
Fair 580–669 17% 17.8%–19.9%
Very poor 300–579 16% 28.5%–32%

 

Best Personal Loans for people with Bad Credit

Like it has been discussed, your interest rate on the loan and APR depends on the kind of credit rating you have, what your DTI is and several other factors. If you’re one of the people who have very poor credit, don’t feel disheartened. There are a couple of companies that give out loans to people with poor credit performance.

Here’s a table for you from where you can find the best personal loans for poor credit performers and also compare their rates.

Lender APR Loan Amount Terms Key Benefit SimpleScore
OneMain Financial 18%–35.99% Up to $20,000 Up to 60 months Same-day funding. 4.5/5
Peerform 5.99%–29.99% $4,000–$25,000 3 years Easy application process. 4/5
NetCredit 34.00%–155% Up to $10,000 6–60 months Low credit scores accepted. 3.2/5
Avant 9.95%–35.99% $2,000–$35,000 24–60 months Mobile application process available. 3.75/5
PersonalLoans.com 5.99%–35.99% Up to $35,000 90 days–72 months Short-term loans available if needed. 4.25/5
BadCreditLoans.com 5.99%–35.99% $500–$5,000 3–36 months Large affiliate network to fund your loan. 3.6/5

Note: Sample rates have been extracted online, courtesy of TheSimpleDollar.

How to get a Personal Loan with no Credit?

Of course, getting a personal loan with no credit is going to be hard, but here is what you can do to get ahead of the situation and actually acquire the loan.

Improve your credit rating

If it is not an emergency to get a personal loan, it is advised to improve your credit rating in the meantime. Your credit rating can be improved through prompt payments of your debts like your credit card. If possible, reduce the credit card limit and do NOT apply for a new one. Working on these areas and even putting in little effort can increase your credit rating within 3-6 months.

Personal meeting/interview

If it is an emergency where you absolutely have to get a personal loan with bad credit and no cosigner, you can have a meeting or an interview with the lender. The best you can do is explain your situation and prove to them that you’re not a bad risk after all.

Online Lenders

Online lenders such as Prosper, Upstart and Lending Club, have options for people with a poor credit history. While you may still need at least one or two accounts in your credit report, these lenders look at features of your financial profile beyond just your credit reports and scores when considering you for a loan.

Credit Unions

Another option is going to credit unions that may be affiliated with your employer or your community. Such organizations look beyond the credit rating and are often more interested in your income or DTI. Or if it’s a small community bank, they might give you a loan based on your promising character!

Secured Loans

You might try your luck with secured loans, because often when people have bad credit or no cosigner, they get secured loans. You can offer something valuable of yours like a portion of your home or your car as collateral. This gives lenders a peace of mind that at least they wouldn’t be at a complete loss if the borrower defaults on the loan.

Friends or Family

Asking from friends and family for a loan is an amazing option, getting a loan from your family will have you dodge hidden bank charges and lender fees. You can simply tie up with them the agreement and decide on an interest rate. If both parties agree, you can sign the contract with them and make sure you pay back their loan in due time. If not, it could really affect your image in front of them making it hard for you to ask for favours next time.

Shop around

Often what happens is that one lender refuses to lend the loan, but there are other people who would give you a personal loan and that too on a competitive interest rate. Shop around for better rates with more lenders and see if you get a better deal. The best way to handle this situation subtly is by asking around your friends and family- see if they know someone who got a personal loan with no credit and no cosigner. That way you can get a lot of different options and ideas on how to go about your particular situation.

Personal Loan vs. Credit Card on Credit Score

For a credit score to increase, a personal loan and credit card both are great for this purpose. Credit scores are basically metrics used to measure a person’s ability to pay back the loan and whether they will default on it or not. A low credit score will make a person a high-risk borrower, meaning that person has a higher chance of defaulting on the loan.

However, paying on a monthly basis will have a credit card affect your credit score more than a personal loan. With a personal loan, the monthly payments are fixed and each month you’re required to pay that specific amount. But with credit cards, the borrower has the option whether to pay the amount in full or depending on their balance. Thus, making that choice each month has a bigger impact on the credit score.

Conclusion

Having an excellent credit score comes with all sorts of benefits and necessities; it won’t only help you with getting bigger loans on a low interest rate, but also credit score motivated transactions like insurance will be given to you on a low monthly premium rate.

Moreover, you can also try using a very less credit limit. People with the best credit scores have a habit of using less than 7% of their credit limit. Even a very small effort can help you in improving your credit score to a reasonable amount- and you can enjoy all the benefits too.

Building credit is absolutely doable, and the first step to that is making sure all the amount due is promptly paid. Even a single late payment or default will cause a major decline on your credit score.

There are several consequences for a person who defaults on a loan, the biggest one being a drastic fall on their credit score. The credit score determines the creditworthiness of the borrower, and a low credit score will only make it harder- or sometimes even impossible- for you to get another loan.

What is most important in this situation is to make sure that you make prompt payments because a late payment or default stays for seven years on your credit report, which is a long time and a strong enough reason to reject you all the good loans on low interest rates.

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Charles Bains

Charles Bains

Charles Bains started his insurance career as a marketing intern before pounding the pavement as a commercial lines agent in Orlando, FL. As an industry journalist, his articles have appeared in a variety of trade publications. His insurance television career, short-lived but glorious, once saw him serve as the expert adviser on an insurance-themed infomercial (yes, you read that correctly). Having recently worked for various organizations, coupled with his broader insurance knowledge, Charles is able to understand our client’s needs and guide them accordingly. He is a gem for Insurance Noon as his wide area of expertise and experience have been beneficial in conducting further researches to come up with solutions and writing them in a manner which is easy for everyone including beginners to comprehend.

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