Becoming a credit user brings you a lot of opportunities and benefits. However, one must be careful handling credit. If you start building bad credit, it will put you at a disadvantage in several ways.
Lenders pay utmost importance to credit scores before authorizing any credit limit. It can be challenging to avail of a loan with a bad credit score.
What Does Bad Credit Exactly Imply?
If you are an amateur to credit loans, it may be difficult for you to understand what bad credit is.
When a credit user begins to use their credit card, Equifax or TransUnion are given information about the user’s payment activity by their credit provider. Equifax and TransUnion are Canada’s major credit bureaus that keep a record of the credit user’s activities. These reports may differ slightly.
The bureau provides a three-digit credit score to the user. If a score is between 300 to 670, it is considered bad credit. This score is based on the user’s report over the past few years.
When the user applies for a loan or any credit, the lender looks at this score before deciding whether the loan should be granted. If you have not been paying your debts on time, you end up with a bad credit score.
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What are the Advantages of Good Credit?
A good credit score ranges from 660 to 900. This indicates that you are a responsible credit user and are likely to be more eligible for any credit benefits or products.
The lender or credit provider will readily accept such a user’s application for a loan or any credit. Such a user is the best candidate for any loan as he is most likely to make his payments on time.
What are the Consequences of Bad Credit?
If you have been falling back on your debt payments, your credit score can easily slide down to the range of 300 to 600. This score is considered to be a bad credit score. It makes the lender qualify you as an irresponsible borrower, making you ineligible for any credit benefits or loan.
With a bad credit score, the user can only apply for loans with less credibility and higher interest rates. Besides the late or missed debt payments, many factors contribute to decreasing your credit score, such as the following:
- If your credit report has any profile error, the score reduces. These errors include the wrong name, address, or profile mistake.
- If your banking information, credit card, or id is stolen or hacked, it also results in a reduction of the credit score.
- A large amount of debt can also lead to the same. The user should not have many applied credits.
What are Bad Credit Loans
The traditional loans provided by the banks are very conditional and restrictive. These loans are limited to credit users with good credit scores. The users with bad credit are not considered during loan approbation by the banks.
The bad credit loans differ significantly from the traditional loans these banks provide. The lending policies for both the loans also differ in many aspects.
The bad credit loan aspirants can search for a loan grantor that focuses explicitly on bad credit-friendly loans. Searching for a safe alternative to a bank is very important in these cases as there can be a risk of fraud. Such subprime creditors are more alluring than the major loan or credit providers because:
- The application process is more straightforward than other credit providers.
- The deposition of funds is much faster than the banks.
- The loan policies are less conditional.
- The user’s income and other factors play an important role during the approval process rather than the credit score given by the bureaus.
Factors that create risk or make the bad credit loans less attractive are as follows:
- There is a considerable risk of fraud or scams in these loans.
- The companies handling these loans are private, increasing the possibility of management crises and the risk of illegal prices.
- The interest rate is much higher than the traditional loans provided by the banks.
Qualification Tips For Bad Credit Loans
Bad credit loans also have basic requirements. Here are some tips that can help you qualify for a bad credit loan:
- Working for a few months as a full-time worker or employee is strongly recommended.
- Saving money from your salary and using it to pay your current debts can make you a more eligible candidate. This will reduce the burden of debts from your shoulder and make your record clearer.
- Find a guarantor that can help you to cosign the loan application. Also, you can mortgage any one of your assets.
Options For People With Bad Credit
As a borrower with bad credit, you can opt for the following types of loans:
Secured Loans
The lender asks the borrower to keep an asset mortgaged under the lender in a secured loan. If the borrower fails to repay the debt, the lender will sell the asset to recover the losses. If you have adequate assets to mortgage, your credit score will take a backseat, and lenders would be more willing to provide a loan.
Guarantor Loans
In this type of loan, the borrower asks a person (guarantor) to cosign the loan application. A guarantor is a person who agrees to pay the debt if the borrower defaults. A guarantor is typically a person with a good credit score.
Endnote
Improving your credit score is always important. Make sure you make all your payments on time and do not miss loan installments. Gradually, your credit score will reflect your changed financial habits.
Meanwhile, you can consult a financial expert who can guide you on various options available while your credit score is still low.