The 411 on Credit Scores and Bad Credit Loans
August 27, 2019 by Emma Gordon
Have you ever been denied a loan? It happens to more people than you might think. According to the Report on the Economic Well-Being of U.S. Households, nearly a quarter of respondents who applied for a loan were denied at least once, while 32 percent were denied or offered less credit than they wanted.
In many cases, approval relies on the three-digit number of your credit score. While mainstream banks may deny someone with below-average credit, not all lenders prioritize this score when approving applications. Some lenders consider other factors more heavily than your credit score when they review your application.
But we’re getting ahead of ourselves. Let’s start with the basics and work our way from there. Keep scrolling to learn about what a credit score is and how someone with bad credit might successfully secure a loan.
What is a credit score?
A credit score represents your credit history as a three-digit number. Banks, lenders, and credit agencies use this to assess the potential risk they may take on by lending you money.
Think of this number as your record of performance as a borrower — the better you are at paying bills on time, the higher your more likely a mainstream bank will issue you a personal loan or line of credit. As for people with no credit — more on that later.
Having a lower credit score may limit your options, but as you’ll see later, a low score may not stop you from securing an online loan.
A breakdown of FICO scores
Although there are other credit rating systems in use, FICO (short for the Fair Isaac and Company) is the most popular one used in the U.S. Most financial organizations look at your FICO score to determine your creditworthiness.
FICO organizes credit scores into five categories: excellent, good, fair, poor, and bad. The following table shows you the numerical range for each of these categories.
750 and above
700 – 749
650 – 699
550 – 649
549 and below
The excellent range tops out at 850 as the highest credit score possible — though few people manage to achieve such a squeaky-clean score.
How is your credit score calculated?
The above range may seem arbitrary when you don’t know much about credit scores, but the FICO system relies on an elaborate algorithm to assess how you’ve used credit in the past. It checks everything from personal loans and credit cards to your cell phone bill and rent payments.
FICO then considers these major factors when determining your score:
- Payment history — This factor considers how well you pay your debts on time. People struggling to make ends meet may end up paying bills late. This may lower their score depending on how creditors report to credit bureaus.
- Debt burden — This category considers how much you owe in total. A greater amount of debt doesn’t always mean you’ll have a lower score, as FICO will compare your debts to your payment history to see if your accounts are in good standing. It will also look at your credit utilization ratio — or how much of your available credit you actually use. By using less of your total limit, you’ll have a lower credit utilization ratio, and potentially, a higher credit score.
- Length of history — This is simply an assessment of how long you’ve had any one account under your name. FICO favors older accounts over newer ones because they offer more insight into your payment habits.
- Types of credit — FICO rewards someone with a variety of accounts (like mortgages, installment loans, and credit cards) as long as they’re in good standing. As with the length of your history, a varied credit history offers more data about how you behave when facing different kinds and sizes of debt.
- Recent hard credit inquiries — If you apply for a traditional personal loan, for example, a lender may perform a hard inquiry. Mainstream lenders use a hard inquiry to review your credit when you apply for a loan. This hard inquiry will show on future credit reports. Multiple credit checks on your file may negatively affect your score. But don’t worry if you make a score at Experian or Credit Karma. These companies perform soft inquiries, so their checks won’t have any impact on your score. Here at MoneyKey, we also perform soft inquiries when reviewing loan applications.
The FICO system considers these factors to figure out your score. Although each factor plays a part, payment history and debt burden are weighted more heavily than the others — suggesting a large amount of debt with overdue payments on file may overshadow a long and varied history.
Most people aren’t aware of the credit basics
There’s more to your score than just paying bills on time.
In 2017, NerdWallet teamed up with Harris Poll to conduct an online survey of more than 2,000 adults in the U.S. They asked questions testing the participants’ understanding of how credit may affect their finances.
The results suggest some people are ill-informed about credit and how it works. Here are just a few highlights from the study:
- More than 1 in 10 Americans think they start out with a perfect credit score. In reality, it’s something you build up over time (more on how to build your credit below).
- 2 in 5 Americans think carrying a small balance from month-to-month will improve their score. It doesn’t. You should aim to pay off your entire balance each month if you can. If you can’t, try paying as much as you can.
- 2 in 5 Americans don’t know that bad credit can impact what they pay in car insurance. In fact, 23 percent of Americans don’t realize bad credit may negatively impact their chance at renting an apartment.
- Nearly half of respondents (49 percent) didn’t know that having bad credit may limit their options for cell phone services.
Do you share some of the same beliefs? Let’s clear up some of the misconceptions about how credit can impact car insurance, apartment rentals, and cell phones.
What is a good credit score to lease a car?
Your credit and your car are deeply entwined, and your score may affect your ability to lease a vehicle. A high or prime score of 740 or more is ideal, but fair or near-prime scores of 620 above will probably be approved. Click here to learn more.
What is a good credit score to rent an apartment?
If it’s not your car that you’re worried about, maybe it’s your home. The higher your score is the more likely your rental application will be approved, but there are ways to secure an apartment even if you have a low score.
What is a good credit score to buy a phone?
Cell phone companies may check your credit when you’re signing a new contract, and a lower score may affect how much you have to pay for your phone and plan.
Ignorance isn’t bliss — it may end up lowering your score!
When you aren’t sure how your financial behavior affects your credit score, you’re more likely to affect your chances at securing anything from a cash advance to a new cell phone.
For example, say you carry a balance on your credit card every month even if you can pay it off, your reasoning doesn’t mean anything to a credit agency. All they will see is that you haven’t been paying off your balance every month.
No credit is not worse than bad credit — but it has its disadvantages
So what’s the use of having a credit score when it might drop so easily? You might as well skip over the whole thing, so you don’t have to worry about your credit score. Right?
Not so fast — although zero credit isn’t the same as having bad credit, it impacts your chances of successfully securing a loan in a different way.
Without a credit history, you don’t have any evidence of your borrowing habits to show to credit agencies. The FICO score favors long credit histories that show positive financial actions — more data means the prediction about your creditworthiness is more likely to be accurate. Without a credit history, the FICO score struggles to predict whether you’ll repay money you borrow.
A chunk of the population has little to no credit
According to a report conducted by the Consumer Financial Protection Bureau in 2016, 26 million adults in the U.S. are credit invisible. This means they don’t have a credit history with any of the three major credit reporting agencies, Equifax, TransUnion, or Experian. As their name suggests, they’re effectively invisible to these companies and any financial services running a check on their names.
Another 19 million are what they call “unscorable”. These people have such a small credit history that it doesn’t provide enough data for an organization like FICO to assess and grade. They may have only just recently applied for credit, or they may not have used their credit in the past six months or more.
When most mainstream lenders see zero or unscorable credit, it raises a red flag as they can’t see how you’ve handled credit at all. There’s no way to assess the risk they might take on by lending to you.
Balancing the risk of lending with serving consumers
In theory, it’s a smart business move that protects these companies from lending to potentially high-risk borrowers. In practice, however, it could deny financial assistant to people with a poor credit score or a lack of documented credit.
Sometimes, bad credit may not be easy to avoid. Let’s say, in the past, you faced serious medical issues or a period of unemployment that made it impossible to pay bills on time, and these late payments may have impacted your credit score. Although by now you may have recovered, your credit score may still be affected.
As a result, it may seem hard to establish good credit simply because no one wants to give you a chance. Here at MoneyKey, we don’t rely on credit scores the same way. That’s why we’ve developed a system to help those locked out of traditional borrowing options.
How do these types of loans work?
is a type of personal loan or cash advance that allows borrowers with thin or bad credit to apply. When you apply to get an online loan from MoneyKey, our process puts less of a focus on your credit score than most mainstream lenders. Although we may check your credit, has no effect on your current score.
Instead, we analyze your ability to repay your loan by looking at other factors — like your income and employment history. By putting less of an emphasis on your credit history, our process gives people with low or no scores a chance at getting a cash loan for when emergencies require financial help.
Even people with bad credit have options when you contact bad credit loan companies. Depending on where you live, loans for bad credit may include:
Payday loans: These cash advances are ideal for when you need help covering expenses that pop up between paychecks. MoneyKey only offers them in California. If you live here and secure one of these loans, they’re normally due in full on your next pay date.
Installment loans: These loans are ideal for when you find it challenging to pay for an unexpected bill on top of your regular bills. Unlike payday loans, online installment loans are repaid through a series of scheduled payments, with each payment typically scheduled on your pay dates.
Lines of credit: These financial products are like having cash on standby for when the next emergency happens, such as unexpected auto repairs, household maintenance, or medical bills. Once you have been approved for a line of credit, you may withdraw funds up to your available credit limit when you need it.
Each of these is an example of an unsecured bad credit loan — which means you don’t have to put up collateral like your car or home as a guarantee against the loan.
Research your options to borrow within your limits
To make sure an unsecured bad credit loan is right for you, always make sure you read the terms and conditions— we even suggest comparing them to what other bad credit loan companies offer to get a better idea of what’s available.
Some may offer revolving credit while others require you to apply for each new loan separately. Some companies will apply late fees if you miss a payment, while others will apply a late fee plus interest for each day you’re overdue.
These subtle differences may improve your ability to repay what you owe without putting the rest of your budget at risk. By reading the fine print, you’ll be aware of these conditions, and you may find an option with rates and terms that fit your ability to repay.
How to fix your credit — building credit
When you were in school, your final grade in any subject was a permanent record of how well you did in class. Your credit score isn’t like this. It’s a constantly changing score that includes information only from the last ten years. Generally, “bad marks” against your credit last anywhere between seven and ten years.
This is good news! A tardy payment or poor credit utilization ratio will eventually slough off your history and your score will adjust accordingly. Even major financial issues, like bankruptcy or foreclosures, will vanish off your report after a decade.
That means you have the ability to improve your score even while you use bad credit loans. Although these loans will not improve your credit, they won’t lower it, and you may perform other credit building tasks while you use them. If you’re ready to re-establish good credit, try out the following:
- Pay your bills on time. Your payment history has a significant impact on your score, so avoid paying bills and other responsibilities late — including utilities, rent, and your cell phone. If you can’t pay them off in full, you should try to meet the minimum payment.
If you’re struggling to make ends meet, a household budget may be the tool you need to get your payments on track. Remember, you should include everything you normally spend money on when you table your budget. You should factor in the cost of your commute in addition to your regular utilities, groceries, and housing costs to get an accurate picture of your finances.
- Pay your debt when possible. Where you have any debt, try to pay off what you can as soon as possible. If you have to borrow money, credit card, or mortgage you know you can repay. In many cases, if you take out a mortgage, your lender will consult a mortgage-specific score that’s separate from the score an online lender would check. So what is a good credit score to buy a house? It depends on your lender. While government-insured FHA mortgages may accept a score as low as 500, VA mortgages may not require a FICO credit score to buy a house.
- Don’t apply all at once. Every time you apply for a new credit card or loan through traditional means, you may have a hard inquiry performed on your history. You may experience a dip in your score if your history shows multiple hard inquiries in a short period of time.
- Find the perfect credit utilization ratio. It’s usually a good sign to creditors when you use less of your credit limit. Most experts suggest using just 30 percent of your limit per card or loan!
- Check your credit report often. It’s not always the case, but sometimes you may have a poor score through no fault of your own. A Federal Trade Commission study found that a quarter of people found errors on one of three of their major credit reports that may impact their scores.
By performing a soft inquiry regularly, you may be able to spot these discrepancies and dispute them before they limit your options. Everyone in the U.S. is entitled to one free credit report each from Equifax, Experian, and TransUnion every 12 months, so take advantage of these and check your report three times a year.
Just remember, your credit score is cumulative – meaning one missed payment won’t necessarily result in a poor credit score. Focusing on the positive is one of the subtler tips for dealing with financial stress. Finding the bright side to a situation may prevent negative thoughts that may stop you from taking the action you need to improve your credit.
Bottom line: bad credit isn’t ideal, but there are options
A low credit score may harm your chances of securing a personal loan through traditional means. Mainstream banks that use traditional credit checks will see a low score and may deny you some or all of the money you need, which is the last thing you need when facing a financial emergency.
Here at MoneyKey, we understand how frustrating this can be – which is why our simple and convenient online process puts less of an emphasis on your credit score – focusing on your ability to repay what you borrow instead.
If you have bad credit and need a loan, make sure you borrow in a way that fits your finances. To make sure we’re a good fit for you, contact us anytime for more information about securing a personal loan. One of our Customer Care agents will answer your questions and set you on the right path.