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13 Reasons You May Need a Bad Credit Loan
1 Sep 2018

How Do You Get Bad Credit? 13 Reasons You May Need a Bad Credit Loan

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Nearly a third of Americans have bad credit. If you’re learning about how credit ratings work, or you’ve recently been refused for a loan, you may be wondering how this happened.

How do you get a loan with bad credit? And what can you do once you’ve already got bad credit?

Read on to find out.

What is Bad Credit?

To understand what bad credit means, you first need to have a firm grasp of the different credit scores.

Credit scores make it easy for lenders to see how risky it would be to lend to you. They look at your borrowing history to see if there’s a high chance you would default on your loan. This used to mean that a lender would have to look at your credit report, manually scanning through page after page of your borrowing history.

Not only is this time-consuming, but it can be easy to miss the most important details. A credit score is based on your credit report, but a computer program takes all of this information and gives it a score. Lenders can use that number to evaluate your chances of repaying your loan.

There are numerous different credit scores, but most people consider the FICO credit score to be the most reliable.

This score is all about how much debt you currently have, how much you’ve managed to repay in the past, and more. Your score could be anywhere between 300 and 850.

These are the components that make up your credit score:

  • Payment history (35%). Have you defaulted on loans or missed payments?
  • The amount owed (30%). Are you maxed out? How much do you owe?
  • Length of credit (15%) Have you been borrowing for a long time or is this new?
  • New credit (10%) have you been applying for a lot of loans recently?
  • Type of credit (10%) do you have a mix of different debt? (credit cards, home, auto, etc).

The higher your credit score, the better:

  • 720= Excellent Credit
  • 690-630= Good Credit
  • 630-690= Fair/Average Credit
  • 630 and under= Poor Credit

A higher score indicates to lenders that you have a responsible financial history and you’re likely to pay any loans they approve.

How Do You Get Bad Credit?

Reasons You May Need a Bad Credit LoanIf you’re comparing your credit score to the above table, you may be wondering how you got bad credit in the first place. Here are some of the top reasons why you may now have poor or bad credit:

1. You Paid Late

As mentioned above, 35% of your credit score is dependent on your payment history. If you’re constantly late on your credit card payments, your credit score will be negatively impacted.

If you’re simply forgetful, consider setting up a direct debit payment to your credit card before it needs to be paid each month. If you’re hoping to preserve your credit score, you should always be paying your credit card payments (and other debt payments) on time.

2. You Didn’t Pay at all

Sometimes, life can get stressful. If you’re in a rough financial situation, you may simply ignore your credit card bills. This type of activity is surprisingly common for people who feel overwhelmed- after all, if you don’t read the bills then they don’t exist…right?

Every month you miss paying your credit card (or loan), you become one month closer to ending up in collections. And of course, this is hugely damaging to your credit score.

3. An Account Was Charged off

If you’ve ever completely stopped paying a credit card or line of credit, it may have been charged off. This means that an insurer has given up on the idea of you paying.

While you may assume that because it’s “written off” you no longer need to pay, but this isn’t true. This is also one of the worst things that can happen to your credit report.

A charged-off account will linger on your report for seven years plus 180 days from the delinquency.

4. An Account Was Sent to Collections

Often, creditors will send accounts to third-party debt collectors who aim to collect payment from you. They’ll often send it to collections right before or after they charge it off. This status shows that your creditor gave up on getting payment for the account and had to hire someone else to try and get the payment from you.

Often, debt collectors will report this on your credit report, so it will have another negative entry. This also stays on your account for seven years, although if you pay it in full it will be updated to indicate this.

5. You Filed for Bankruptcy

Bankruptcy is one of the most financially extreme measures and is guaranteed to completely devastate your credit score. Just like some of the above, it will also impact your record for seven years.

6. Your Home Was Foreclosed

No one wants to think that their home will be foreclosed. But sometimes all it takes is a job loss, huge medical bill, and/or rising interest rates.

If you get behind on your payments, your lender may foreclose on your home. Unfortunately, this will also impact your credit score, making it even more difficult to get approved for credit in the future.

7. You Have High Balances

Since a large part of your credit score is made up of your credit utilization, you may have a lower score than you expected if you have high credit card balances (close to your limit). As your credit utilization increases, your credit score will decrease.

Try to avoid having a credit utilization of more than 30%.

8. You Only Have One Credit Card

This may seem like a responsible move. After all, limiting yourself to one credit card can help you avoid getting into credit card debt. However, when you’re only using one credit card, your credit score will be harmed due to the previously mentioned utilization ratio.

9. Your Credit Report is Wrong

The U.S federal government mandates that all residents can receive one copy of their credit report each year.

You can request your free credit report and review suspicious activity to ensure your information is correct. Keep in mind that there are three credit reporting bureaus, and they all may have slightly different information.

If you spot something wrong on your credit report, it’s important to get it cleared up immediately so your credit score can begin to recover.

10. You Paid Collection First

It’s not uncommon to run into problems in life and miss payments on your credit cards. And if you’re the responsible type, you may be working hard to pay back what you’ve borrowed.

But it’s much more important to keep your active accounts current than it is to pay anything that has already gone to collection.

Unfortunately, the damage is done as soon as an item is registered for collection on your credit report. Paying that collection or not won’t impact your score. But not paying your current items will continue to have a massive negative impact on your credit score.

11. You’ve Closed Old Credit Cards

If you have a credit card you never use but it doesn’t have an annual fee, you’re better off keeping it open. That’s because 15% of your credit score is your credit history- the longer the better. When you close old cards, it makes your history seem shorter- reducing your credit score.

12. You Closed a Credit Card With a Balance

You should never close a credit card until you’ve paid it off. That’s because your credit limit for that account will drop to $0. But the balance remaining to be paid will stay the same. This will make it appear that your credit card has been maxed out, and this will cause your score to drop.

13. You’ve Applied For Multiple Lines of Credit

10% of your credit score is based on your credit inquiries. If you apply for several credit cards or loan within a short time period, your credit score will drop.

Some people are attracted to certain credit cards due to their cashback bonuses or travel rewards credit cards. Credit card companies love to use these types of bonuses to attract new customers.

Unfortunately, if you’re the type to continually open and close accounts based on these rewards, your credit score will be suffering. And if you apply for a few in a short period of time, you can expect to see a drop in your score.

Wrapping Up

As you can see, there is a massive variety of reasons why your credit score could be lower than you were expecting.

If you need a good credit score to get a loan, don’t panic. You still have options, and there are plenty of ways you can get a loan or line of credit even with bad credit.

For more information, check out some of the best bad credit installment loans available online. Alternatively, get in touch today to learn more.