Your credit score is an acknowledgement of your financial behaviour. A decent credit report suggests that you are loyal to your financial commitments, while a poor credit rating suggests that you have racked up debt. While small emergency loans could be qualified for despite a poor credit score, you still need a good credit rating.
An abysmal credit rating will lower your chances of getting approved for a loan. If you manage to get the nod for a small emergency loan, interest rates will be quite high. It makes the payment much difficult, and chances are you will fall into an abyss of debt.
Having a bad credit score is not a surprise. There are various factors that are taken into account to calculate your credit score. For instance:
· How much money do you owe?
· Late payments
· defaults
· Credit inquiries
· A debt-to-income ratio
· A credit utilisation ratio
It is not always necessary that your credit rating is not impressive because of late payments and defaults. Sometimes, it could be a result of multiple credit inquiries and a high debt-to-income ratio. How risky you are perceived by a lender also decides how much you will be able to qualify for.
Even though you have been paying off your debts on time, a high amount of debt will increase the risk of default. As a result, a lender will charge very high interest rates.
Tips for qualifying for a loan with a bad credit score
Getting a loan with a poor credit rating can be challenging, but it is not impossible. You should consider the following tips in order to qualify for these loans at affordable interest rates.
· Whittle down your debt-to-income ratio
A debt-to-income ratio does not directly affect your credit score, but it is an important factor that a lender must take into account to determine how risky it is to lend you money. No lender would want you to become unable to discharge your debt, as they would never want to bear losses. If they find that your debt-to-income ratio is quite high, they will have misgivings about your repayment capacity.
Taking on a new debt might put a strain on your budget. It is likely that you face challenges while repaying your debt. Therefore, you should aim at reducing your debt-to-income ratio. A golden rule of thumb says that you should aim for a 30%. The lower the better.
While lenders ensure that they do not lend more than your affordability, it does not mean that you should throw caution to the wind. A rule of thumb says that you should carefully analyse your repayment capacity before filling in the application form.
There are direct lender bad credit loans with guaranteed approval, but the fact is that no lender can provide you with guaranteed approval. You must prove that you can afford to pay back the debt.
· Have a steady income source
Having a stable income source increases your chances of applying for a loan. With a stable income source, you can offset the impact of having a bad credit rating. It insinuates that you can repay the debt on time.
Those who are employed and receive a fixed remuneration every month could easily prove their stable income, but freelancers often struggle to do that because they receive weekly or bi-weekly payments only when they have work.
· Arrange a co-applicant
Qualifying for a loan with a bad credit rating can be challenging in the following circumstances:
· You are a freelancer.
· Your debt-to-income ratio is high.
· You missed multiple payments in the past.
In such circumstances, you can consider applying for a loan with a co-applicant. A co-applicant is a co-borrower. They must have a good credit rating and strong income sources. This will mitigate the risk on the part of the lender, and therefore, they will most likely sign off on your application.
If you do not have a co-applicant, you should consider arranging a guarantor with a good credit rating. The difference between a guarantor and a co-applicant is that the former is not obligated to settle the dues unless you fail, and unlike a co-borrower, money is not used by the guarantor.
Whether you apply for a loan with a guarantor or a co-applicant, remember that their credit rating will also plummet if you do not meet your obligations. Most of the people hesitate to act as a guarantor because they know tying their account to a bad credit borrower will have a negative impact on their scoring, too, even though you discharge your obligations on time.
· Apply for a no credit check loan
Sometimes, your bad credit score gets in the way of qualifying for a loan at competitive interest rates. While you have the option of arranging a guarantor and a co-borrower, it is not that easy. Most of the people will refuse to act as a guarantor. Your family member would not become a co-borrower unless they need money. In addition, they would never take the risk of losing their credit score by linking their account with yours.
In such circumstances, you should consider applying for a no credit check loan. Yes, you can obtain 100% approval loans from a direct lender with a no credit check. These loans will allow you to borrow a small amount of money without any credit checks at all. The lending decision is based on your income sources. If you prove that you can repay the debt, you will get the nod. However, bear in mind that a default on these loans will lower your credit points.
Tips for doing up your credit score
While you have a chance to apply for a loan with bad credit, it does not mean that you should disregard its importance. You should always aim to keep your credit score in good condition. Here are some important tips to help improve your credit rating:
· Pay your bills on time
It is easy to take on debt, especially if you are borrowing money to meet small emergency expenses. One of the most significant reasons for falling behind on payments is that you take on debt more than you can afford. You can avoid taking a toll on your credit score if you discharge your debts on time.
· Reduce your credit utilisation ratio
A credit utilisation ratio suggests how much credit card balance you owe against the total credit card limit. It should not be more than 30%. However, the ideal ratio is 25%. The lower the better. Make sure that you pay off your credit card bills before your balance is reported to credit reference agencies.
· Avoid too many credit applications
You should avoid too many credit applications because they imply that you are too dependent on credit. Lenders will assume that you are so poor at managing money that you are often desperate to borrow money. They will find you a risky borrower and repudiate your application. You should put a gap if your application has been rejected for any reason.
The bottom line
It is possible to secure a loan with a bad credit score if your overall credit profile is not abysmal. Have a steady income source, apply with a co-applicant or arrange a guarantor, reduce your debt-to-income ratio, and above all, fix your credit rating.
