Peoples' State Bank

Bad Credit History: How to Improve it and How to Get a Loan?

A bad credit history can be a serious obstacle to good loans and loans in general. However, this does not mean that borrowers do not have the opportunity to get a loan at all.

Indeed, banks are reluctant to work with those whose credit score is below 669. However, private lenders and some credit unions are willing to accommodate people who once made a credit mistake.

What Is Bad Credit?

In the US, most borrowers have a credit record with one or more of the three major credit bureaus: Equifax, Experian, and TransUnion. These dossiers reflect the amount they owe and whether they pay their bills on time. In addition, the credit bureau dossier calculates each person's credit score - a number intended as a guide to their creditworthiness.

So bad credit history is the result of the fact that, in the past, the borrower treated loan repayments in bad faith. Regardless of the borrower's reasons, late payments or their absence is reflected in the credit history and lowers the credit rating.

What does a Credit Score Depend On?

In the US, the most common credit rating is the FICO rating. A FICO credit score consists of five main elements - payment history, the total amount an individual owes, the length of a person's credit history, the mix of credit types, and new credit.

Payment history is the most important part, which is 35%. It shows how responsible the borrower is in making payments. The payment history shows each day of delay, and the more of these days, the more the score decreases.

The total amount an individual owes accounts for 30% of the estimate. This includes all the borrower's existing loans: mortgages, personal loans, auto loans, judgments, and other debts. The most important part is the person's credit utilization ratio, which compares how much money they have available to borrow to how much they owe at any given time. A high credit utilization rate (above 20% - 30%) can be seen as a danger signal and lead to a lower credit score.

The length of a person's credit history is 15% of the score. Everything is simple here - the longer the borrower's credit history, the better.

The mix of credit types is 10%. This can include mortgages, car loans, and credit cards.

The new credit is another 10%. New loans or even applying for them are taken into account.

How to Improve a Credit Score?

It is impossible to say exactly how quickly a borrower's credit rating will recover. To a large extent, it depends on how much damage has been done to it. The most "painful" for credit history is bankruptcy, and it can remain there for up to 10 years. However, there are several steps a borrower can take to improve their credit history:

Ask for higher credit limits.
Become an authorized user.
Pay bills on time.
Find and dispute credit report errors.
Use a secured credit card.
Get credit for rent and utility payments.

How to Get a Loan with Bad Credit?

Although traditional banks rarely provide access to money to borrowers with bad credit, they could still get a loan. To do this, such people can turn to private lenders. They provide a range of loans that are available for bad credit.

For example:

Payday loans are short-term loans with limited amounts. People can usually borrow up to $1,000 for 14 days or a month.

Personal loans for bad credit - are long-term loans with larger amounts than payday loans. They differ from ordinary personal loans in that the amount that can be borrowed is most often limited to $15,000. Also, interest rates on personal loans for bad credit will be higher than for a usual personal loan.