Credit scores are one of the key factors when it comes to getting approved for a loan.. For those with high credit card debt, the problem can be exasperating. You are carrying high interest rate debt that you are unable to reduce into a lower interest loan, which would increase your ability to pay back the debt.
Having a combination of high interest rate debt and a credit score that is suffering can create a perfect storm of poor credit. Making only the monthly minimum payments can take decades to dig yourself out from under the debt. Consider these alternatives.
Here are 6 ways to get credit, even when your credit is suffering:
- Equity lines of credit. Loans that are secured by your home are easier to qualify for even when your credit has suffered. Some hard money lenders focus on the home’s value as the key factor, while others focus on cash flow. This makes it possible to be approved for an equity loan even if your credit score is not where you want it to be.
Poor credit will result in a higher interest rate, but this will generally still be significantly lower than credit card rates. The catch is that you must have a lot of equity because banks will offer a lower loan to value to offset the risk. They may only offer a 70% maximum loan to value instead of an 80% or even 90% for those with great credit.
- Credit Unions are banks that operate as non-profits and serve the community, rather than their investors. This opens the door for those with marginal credit to have access to lower rate loans with lower fees than traditional for-profit banks. Secured loans with collateral will find greater success than unsecured loans, but you will find more options at a credit union than a traditional bank.
- Get a Co-Signer. When someone with good credit co-signs the loan, the better credit score is used for loan qualification. Both incomes and debt loads are generally considered. A co-signed loan will provide the individual with poor credit a chance to improve the credit score, while paying off the loan. Terms will generally be set based on the highest credit score.
NOTE: It might be difficult to get a co-signer because if you are unable to make payments, their credit will be impacted. The co-signer must be prepared to make payments if you are unable to. When a co-signed loan involves a family member, failure to pay could destroy relationships and should be entered into with great care. To reduce the risk to the co-signer, have duplicate statements sent to both parties on the loan and grant them online access to the account.
- Store Credit Cards are great starter accounts. They generally have lower qualifying requirements and do not require a deposit in order to secure the line of credit. Often the limits start very low (say $300) but it gives you the chance to prove yourself by paying it off each month. This reestablishes your credit at the same time. Increases in credit lines can usually be obtained after six months of on time payments. Be careful to not slip into more debt with these cards with special offers or sales.
- Secured credit cards can offer a way to re-build credit but require that you have money to deposit in a savings account in order to get a credit card. If you are in need of funds, this option is not always helpful if you don’t have a savings account established that you can use as collateral. For those with no credit or in need of improving a credit score, this is a frequently used strategy for getting a credit score or improving a poor one.
- Credit Card companies that specialize in poor credit. These are reserved for those with scores in the 60’s, but companies like Capital One have built their business on those with poor or emerging credit. Interest rates are generally high and annual fees are common. They offer balance transfer options which will allow you to move high interest rate debt to the new card, in an effort to reduce the interest you pay. Reviewing the fine print and the permanent interest rate can prevent moving balances to a higher rate for the long term.
Loans to Avoid:
Payday Loans and Title Loans are easy to get but you pay enormous fees and triple digit interest for the “privilege” of borrowing from these predatory lenders. The kicker is that they do not report to the credit bureau, so even these high interest rates are not rewarded with an improved credit score.
High Interest Auto loans can be obtained for credit scores as low as 400 to 500. These companies do report to the credit bureau and put a GPS in the vehicle. They have the ability to prevent your car from starting and can pick the vehicle up when payments are at little as 5 days late. They charge interest rates in the 20% and higher range and can go as high as 30%. They also charge thousands of dollars in upfront fees, meaning you will be upside down on your vehicle for years, limiting your ability to refinance, even if your credit score improves.
Inform Yourself Before You Do Anything:
Begin by knowing what is on your credit file and your credit score. Armed with this information, work the phones and speak to lenders about their terms and qualifying factors to determine if you are likely to get approved. This will prevent submitting multiple applications, which can further hurt your score.
If these lead to more dead ends, it may be time to seek professional advice through a credit counselor who is able to explore even more options to eliminate debt. Companies like Strategic Consulting have partnerships with lenders which increase the options and opportunities to get the debt negotiated to a balance you can realistically pay off, based on your current financial position.
It is difficult and expensive to get additional credit when your credit is poor. That is a reality in today’s lending world. The faster you improve your credit; the sooner you will have access to borrowing when you need it. With the average price for a new car sitting at over $33,500 and the average home costing $366,000, access to lending is an important aspect in our lives.