Everybody knows that loans are the most popular way to get some money when you need it fast. However, it’s not that easy to get a loan, especially if you have a bad credit score. Plus, the interest rates can be through the roof. While we know it’s the quickest way to the money we want, we also know it’s not the most financially beneficial option.
Perhaps you’ve decided a loan is the only way to go. Right now, a lot of people might be thinking ”I desperately need a loan but I have bad credit”. If you are in this situation, keep reading! In this article, you will find a few useful tips for avoiding the effects of low credit scores.
What Is a Bad Credit Rating and Do You Really Have It?
Your credit score is determined by your financial history. It is a three-digit number that states your reliability and commitment towards repaying the debt. The higher your credit score is, the easier it is for you to have your loan approved.
Credit scores can be determined in a range between 300 and 850. Any value below 600 is considered bad credit. Every time you don’t pay your bill or credit rate on time, your score goes down. Credit utilization is another determining factor – a high utilization rate means lower credit as well.
On average 16% of American people claim that they have a very bad credit score, or a FICO score of between 300 and 579, according to Experian’s Review. Another 18% have fair credit, a rate of between 580 and 669. Only 1.2% of Americans have a perfect 850 credit score.
Usually, lenders follow different guidelines or scoring models for determining a person’s credit rating. According to Forbes, FICO and VantageScore are the most popular models used for calculating if your rates are good or bad. Both models use the same ranging values, from 300 (the lowest) to 850 (the highest).
It’s very difficult for people with bad credit scores to get a loan. In fact, if you are one of them, you will notice the impact in many aspects of your life:
- It will be harder to rent an apartment since you might be asked to pay a higher deposit or 1-2 months of advance payment for the rent;
- You will have higher interest rates in case your loan is approved. This means that you will spend more money on repaying the debt;
- A bad credit score could negatively influence your application for a mortgage or car loan. The down payment required in these cases is usually higher;
- Auto insurance companies have higher rates for customers with bad credit rating
- If your credit score is low you might be asked to pay a refundable deposit when you apply for utilities.
Look through the statistic of the reasons for taking payday loans:
How Will a Payday Loan Affect Your Rating and How to Avoid This
In general, lenders are not willing to work with people who have bad credit ratings. In this case, citizens who really need money turn to payday loans. This type of credit is a temporary solution, but it can lower the customer’s score and the chance to get a long-term loan in the future.
Payday loans are short-term credits designed for those with bad credit scores. They seem to be an answer to all prayers, but they are not in the borrower’s best interest. They come with sky-high interest rates and the obligation to pay the debt in a short time. Besides, even if you pay all the debt in time, it will still appear in your financial history and affect your credit score.
Since the total repayment sum can be quite high, the borrower might not be able to repay it by the due date. In this case, the customer’s financial history will register a negative situation. It becomes a problem when you apply for a long-term loan and the lender checks your background.
If you’ve decided a quick loan is the best option, even with the high-interest rates, then consider using a payday advance app. At least this way you can get the lowest rates out of all your options, but expect the interest rate will still be high.
It’s not a good idea to apply for several payday loans either. This puts a shadow on your reliability and the capacity to repay a long-term loan when a potential lender checks your application. Your credit score won’t be affected by payday loans if you use some simple tricks:
- Firstly, you should consider a payday loan as an emergency situation. Don’t abuse it and take out too many. This could affect your credit report, as future lenders might consider you unreliable. Also, if you have more than one loan at once it will be difficult to keep up with payments.
- It might be urgent and important, but payday loans come with very high-interest rates. When you apply for the loan make sure you will be able to pay it back in due time. You can get an extension, but it doesn’t look good in your financial background.
- Even if you need more money don’t apply for more than one payday loan. Lenders can see whenever a potential customer applied for a loan. They won’t be willing to give money to a person who is trying to get multiple loans at the same time.
Don’t forget to consider every other option before going after a payday loan. You can try borrowing money from your friends or family, selling a few items which you don’t need anymore, apply for a credit card, or cut back unnecessary costs (new clothes, vacation, and others).
To sum up, payday loans shouldn’t lower your credit score as long as you don’t abuse them. They are useful when you are thinking that ”I desperately need a loan but I have bad credit” and you should consider every aspect before applying for a payday loan. If you are not sure that you can pay all the amount in due time, don’t apply.
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