41 How to get a loan with bad credit
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I listen wrote in and said “My husband and I recently applied for a car loan with several different banks but we were turned down. The banker told us that the reason why we were declined is because I have a bad credit score and my husband doesn’t have any credit at all. I’m so confused and don’t know what we need to do to be in a better financial situation so we can get a car loan, please help explain”!
I thought this was an interesting question because it touches on several different points when it comes to credit and things that are commonly confusing or misunderstood. Whether we all like it or not, understanding how credit works is critical so you can be able to obtain credit when and if you ever need it, just like in the example I just shared with all of you.
I want to go over some facts about credit with you all that will help you in a situation like this.
First, in order to have a credit score, you have to have had or currently have open credit accounts. A large factor that is used when lenders are considering if they want to lend money to you is your credit score. A credit score is a list or summary of information about your credit history or current credit situation for lenders to review and use in making their decisions during underwriting.
If you have very little or no credit history, you have what lenders call a “thin credit profile” because there just isn’t enough information in your file to generate a credit score. In this situation, you don’t have bad credit just NO credit.
This is reminiscent for most young, new adults who are trying to establish themselves but just cant seem to get a leg up when it comes to credit. I remember applying for my first credit card when I was 18 and not being approved because I didn’t have any credit. I was so frustrated because I wanted to get the card to establish credit and they wouldn’t give it to me because I didn’t have any established credit.
Going back to the concept of having “thin credit”, sometimes you have had credit in the past but your previous credit has been closed and fallen off your credit report. This is another example of when you wouldn’t have a credit score, even though you have had credit in the past.
There are also a lot of financial obligations that don’t automatically report to the credit buearus like your utility bills or cell phone contracts. A little fun fact here is that you can use the free service through Experian called Experian boost to get your utility and cell phone bill to report to the credit buearus and report, current positive reporting for you instantly.
With this in mind, I would highly recommend in a situation like this to make sure you have one installment loan or credit card open and actively reporting on your credit report. Open credit accounts stay on your report and continue to report positive history for you, as long as you stay current on your obligation.
If you are not able to obtain an installment loan or credit card due to no or bad credit, you can consider the option or building your credit with a secured credit card or a secured loan. What happens here is lets say you want to get a credit card with a $300 credit line. You set aside $300, and the credit card company uses your $300 as collateral to give you the credit line. It may seem counter intuitive to give $300 to use $300 on a credit card but hear me out. You are setting aside that $300 to build credit and positive credit history so you can later on buy something like a car or a home because your building your credit history for lenders to review.
Another fact that I want to go over is that its important for you to understand that you have more than 1 credit score.
Think about it this way, your credit score is like your weight and the credit agency is like using multiple scales to weigh yourself and getting a different weight each time you weigh. Your credit score changes on a daily basis and the 3 main credit buearus have their own way that they calculate your credit score and according to what type of credit you are trying to get approved for.
Take for example, if your trying to get a mortgage vs trying to get an auto loan. Your credit score will be different for each of those applications because the risk associated with those loans are very different.
Whats important here is to know the range your credit score will fall in, not the exact score itself.
Another misconception that is pretty common is that you have to be in debt in order to build credit. This isn’t true but this is the most common way people build credit. A financially savvy person can build ccredit by using a credit card for free. What I mean is, you don’t charge up everything you can and go on a shopping spree only to have a large balance your trying to pay off over the next few months. A financially savvy person would charge their essential purchases on the credit card and then have the card automatically paid off in full at the end of each month.
What this does is use a tool that is commonly viewed as bad and turn it into a positive tool you are using for good. Your credit history of paying the card off in full each month will report to the credit bueraus and exponentially increase your credit score.
Also, as I had just mentioned, you can use secured credit cards to do this same concept if you don’t trust yourself to pay the card off and then get into a situation where your in way over your head.
In the example that was posed at the beginning of the episode, having bad credit and no credit is sometimes just as bad and putting yourself in a situation to be in control when applying for credit is critical so you can plan for your future.
You have to build up and maintain your positive credit history in order to be financially healthy and prepared for whatever financial moves you want to make in the future.
I also want to point out that having a good credit score can help you with things other than getting approved for credit. If you have a good credit score you can get approved for things like utility accounts and cell phone contracts without having to pay a large upfront deposit. Credit scores even come into play when your applying for things like insurance.
Like I said at the beginning of the episode, whether we all like it or not, your credit has a large part that it plays in your financial health and decisions that you are able to make. If you have bad credit you are affected in several areas of your life, just like being approved for your own cell phone contract.
There are popular gurus that will tell you to not worship that all mighty credit score but I am here to tell you, credit is a tool you can use for good, IF you understand how credit works and how your credit score is calculated.
Your goal should be to raise, improve and maintain your credit score by having accounts open that you know will strengthen your overall financial picture and help you with future money moves you are wanting to make.
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