30% of Americans have bad credit, and many more don’t even have a credit score. It’s easy to fall into a bad credit trap, whether it’s the result of unexpected expenses or financial mistakes. And once you’re stuck, it can seem impossible to get out.
But here’s the good news: With the right type of loans and financial decisions, you can take steps to fix bad credit. You just need to know where to start.
You can use loans to fix bad credit, no matter how terrible your credit score. By fixing your credit, you’ll enjoy lower interest rates and better terms. If you ever wanted to know how to fix bad credit, look no farther than these five loan options.
Yes, You Can Fix Bad Credit With Loans
In addition to a higher interest rate, bad credit can limit your borrowing options and make it difficult to purchase a vehicle, home, or other large expense. When your credit is hurting, it can affect every facet of your financial life.
Ironically, many loan options exist specifically for those with bad credit. They can be the key to combatting credit card debt, building a positive credit history, and improving your credit mix.
If you have bad credit, these five loans for bad credit may be able to help.
1. Unsecured Personal Loan
Applying for a traditional personal loan is an accepted way to improve your credit. Keep in mind that while unsecured personal loans are more difficult to acquire, many lenders specialize in personal loans for people with bad credit or no credit.
A personal loan does two big things to fix your credit. Firstly, it makes for a more comprehensive credit mix. Your credit mix refers to a healthy combination of credit lines, such as having a personal loan, credit cards, and student loans all at the same time.
By taking out a personal loan, you further diversify your credit mix. Since your credit mix amounts for roughly 10% of your credit score, it’s a significant boon.
More importantly, you can use your personal loan to pay off credit card debt. What’s the point? Well, the idea is to snag a personal loan with a lower interest rate than your credit card—which isn’t too rare.
When you pay off your credit card debt, you’ll give your credit utilization ratio a bump. This refers to how much credit you currently use. The less credit you use, the better your score.
2. Secured Personal Loan
Having trouble finding an unsecured personal loan? When you have bad credit, you may have to opt for a secured personal loan.
With a secured loan, you use personal assets as collateral. Lenders want assurance that their borrowers will be able to repay the loan. If you have bad credit, they’re not certain you will.
But when your loan is secured, lenders don’t have to worry about your ability to pay them back. If you miss a payment or default on the loan, your lender will seize your pledged property and auction it off to make up the difference.
While this may not sound appealing to many, secured loans are as good as personal loans with no credit check.
Always be sure to make the monthly payment on any loans, but this is doubly true for secured ones.
3. Secured Credit Card
While we’re talking about loans, it’s important not to forget about credit cards. In many ways, they act like convenient, open-door personal loans. And they can help you fix your bad credit.
When you’re in really bad shape, consider a secured credit card. Rather than pledging property like a secured loan, you make a security deposit to open the card. The deposit usually matches the price of the credit line and will be used if you default.
After a few months of regular payments, you’ll improve your credit history and, in turn, give your credit score a boost.
4. Credit-Builder Loan
Credit-builder loans are specifically designed for one purpose: to build or fix your credit score. It doesn’t get more specialized than that.
A credit-builder loan is basically a forced savings account. Every month you make a payment to the lender. You don’t receive the money from your loan until you finish paying it off.
Your lender reports your payments to the three top credit bureaus, which build your credit history over time.
Typically, credit-builder loans are offered by either credit unions or community banks. If you aren’t a member, you can also find online lenders or try a Community Development Financial Institution.
5. Use a Co-Signer
Co-signing is a popular option for those with bad credit or no credit history. When you apply for a loan, a co-signer can pledge to pay your debts should you default. Just like using collateral in a secured loan, it gives lenders confidence that they’ll get their money back.
A co-signer with good credit history can make up for your bad credit. This means you may be able to negotiate for lower interest rates than you otherwise would have received.
Financial institutions consider you each to share a portion of the debt. This means your monthly payments will be reported to credit agencies. Co-signing is an intended way for people with bad credit to land a loan and strengthen credit.
Remember that having a co-signer is risky in that you can damage your relationship should you miss a payment.
Improve Your Credit With a Personal Loan
It might be surprising that you can fix bad credit with a personal loan. Credit scores are complicated, and that’s one of the reasons why so many Americans have poor credit. But with your newfound knowledge, you’ll be in a better situation to take advantage of personal loans intended to fix bad your credit.
If you want to improve your credit, Bonsai Finance might be able to help. We pride ourselves in improving the financial security of our customers. Request a personal loan and see if Bonsai Finance is right for you.
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