Table of contents

→ What is bad credit?

→ What does your credit score mean?

→ How to build your credit

→ Financing options for those with bad credit

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If you have bad credit or no credit at all, obtaining financing can be a difficult task. Most lenders will look into your credit history and get your credit score to determine how much risk you carry as a borrower. Their decision to lend to you will be based upon the results of their search.

If you have bad credit or no credit at all, there are some financing options available to you, but before we delve into these, let's look at what "bad" credit is.

What is bad credit?

Having bad credit means that, in the eyes of a lender, you are a risky borrower. It usually means that you have a significant amount of debt or have been late making payments in the past. Different factors are taken into consideration, and a score is given to rate your credit.

What does your credit score mean?

Credit scores are based on the following five factors: payment history, the amount owed, length of credit history, credit mix, and amount of new credit. All of these considerations are taken into account to give you a score between 300 and 850. The higher your score, the better your credit rating is. Most credit ratings follow these five rankings:

Exceptional: 800 and above
Very Good: 740-799
Good: 670-739
Fair: 580-669
Poor: Below 580

How to build your credit

Building up your credit and improving your credit score is very important to obtain loans and other financing options in the future. Working towards improving your credit can go a long way to improving your overall financial health. While it may take some time to see significant improvements, there are numerous ways to ways to boost up your credit score, such as:

• Pay off your debt

The less debt you have, the better your score will be. Making every attempt to pay off as much debt as possible will decrease your risk as a borrower and get you even closer to becoming debt-free. Finding ways to increase your monthly debt repayment or applying for a debt consolidation loan are some of the most common ways to reduce the amount of money you owe.

• Pay all of your bills on time

Making payments on time is extremely important and can raise your credit score. Lenders look for borrowers who can pay back their borrowed funds promptly. Those who make late payments or frequently miss payments will be penalized in their credit rating.

• Apply for a credit card

If you have never borrowed money before, you won’t have an established credit score, and this can be just as detrimental when applying for a loan. Since you have no past credit history, lenders have no idea what kind of borrower you will be and what level of risk that you might pose. Applying for a credit card and using it carefully is a great way to establish a credit history.

• Apply for a credit builder loan

Smaller lending institutions or credit unions may provide you with a credit builder loan. As its name suggests, credit builder loans are designed to help you build up your credit rating or establish a credit score. Instead of getting the loan amount upfront, with a credit builder loan, you make monthly payments first and get access to the funds at the end of the loan term, as long as you have completed all payments in full and on time.

Financing options for those with bad credit

While it's always a good idea to boost your credit rating, sometimes you need a loan right away and don’t have the time required to improve your credit score. If this is the case, there are still some viable financing options that you can look into. Some of the most popular choices for those with bad credit include:

• Add a co-signer

A co-signer is someone who signs for the loan along with you, guaranteeing that you will make all of your payments. If a payment is late or missed or you cannot pay the loan back at all, the co-signer is responsible for taking over the loan.

If you have poor credit, having someone cosign for you will improve your chances of being approved for the loan and increase the amount of funds you are eligible to borrow.

• Secured loans

A secured loan requires you to offer up something of value as collateral to obtain the necessary funds. If you are unable to repay the loan in full at the end of the loan term, the lender has the option of seizing your assets. The most common items used as collateral include your home, a vehicle, or an investment account.

• Payday loans

A payday loan allows you to take out an advance on your paycheck.

These types of loans can be hazardous as they usually carry a very high-interest rate. If you cannot pay the loan back right away, you could end up owing a significant amount of interest that continues to multiply.

On the other hand, if you need to borrow money for a short period and are confident that you can pay it back as soon as the loan is due, they can be a functional solution. Payday loans don’t usually require credit checks or stringent lending criteria.

• Reverse mortgage

A reverse mortgage can be the perfect financing option for those with bad credit if you meet the criteria for this type of loan. If you are over the age of 55 and own your own home, you can borrow against the equity in that home, no matter what your credit rating. Most lenders will allow a loan value of up to 55% of the current market value of your home, and no monthly payments need to be made to pay the loan back. The lender is only paid back once the borrower passes away, or otherwise ceases to occupy the home. Plus, this type of loan can be used to fund anything you wish, easing your financial burdens without the hassle of monthly repayments.

Having a bad credit score can be extremely stressful. If you find yourself in this situation, don’t worry. There are many different ways that you can raise your credit rating and numerous financing options that you can choose from to meet your financial needs.

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