Bad Credit

Bad credit can prevent you from qualifying for a debt consolidation loan at favorable terms. Bad credit will cost you thousands of dollars in interest payments to credit cards, car and home payments.

Help For Bad Credit

Costs Of Bad Credit

Bad credit is an epidemic in America, with more than half of all consumers strapped with such low credit scores that they can’t borrow at market rates.

Some families can’t finance a home, and poor credit means about a fifth of the population must turn to fringe financial services like payday loans or borrow from family members.

Low savings rates and stagnant incomes contribute to the problem. Poor credit hits families hard. They live close to the financial brink, just an expensive car repair or medical emergency away from insolvency. And they are often blocked from borrowing to buy homes, pay for cars and continuing education that might lead to better-paying jobs.

Repairing your credit can take time and requires thoughtful money management. Ruining a credit score, however, might not take long at all.

Consider what happened to Jimmy, who lost his job as a welder during the Great Recession. Though he was able to collect state unemployment insurance, it wasn’t enough to pay the mortgage or the expense of raising two small children.

Jimmy ran through his emergency savings in four months. When he stopped paying his mortgage, the bank foreclosed. His two credit cards also fell into default. By the time he eventually returned to work a year later, his family was living with a relative and his credit was flat-lined.

Jimmy’s credit repair job took several years. Even though his income bounced back, albeit at a slightly lower level than before the job loss, he was able to begin making payments on his credit card through a debt management program.

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How To Borrow With Bad Credit

But the recovery had consequences. At first, he could only get a secured credit card. When his credit improved enough to qualify for a conventional credit card, he was shocked to learn that the interest rate on unpaid balances would be more than 25%. He also learned that he would have to wait several years to qualify for another mortgage loan.

For folks like Jimmy, a major financial setback is a double whammy. First there is the immediate loss of home and purchasing power of credit cards, then there’s the problem of re-establishing credit. Lending guidelines were tightened after the economic meltdown, making it even harder for those with tarnished credit to borrow money.

The first thing anyone whose credit score took a nosedive learns is that borrowing costs more and that’s if you can even qualify for a loan or a credit line. Home loans might be impossible to get, or might require a huge down payment or co-signer. Car loans have very high interest rates. Credit card options are limited. Even finding a landlord willing to rent you an apartment with bad credit can be difficult if your credit score is under 550.

It’s the subprime dilemma, and according to a 2015 report from the Corporation for Enterprise development, 55.6 percent of American families face it to some degree due to low credit scores.

What can you do to climb out of a poor-credit morass?  Here are a few options:

  • Clean up your credit report: Dispute debts with creditors, collection agencies and reporting bureaus of they are not yours. Get credit report education and take steps to improving your credit score through on-time payments and knocking out old debts.
  • Consider a debt consolidation loan. Debt consolidation has a single monthly payment, eliminating the need to balance an assortment of required payments. Debt consolidation works well for some people, and eliminates calls from debt collectors if your credit cards are delinquent or in default. Such loans require that you have a credit score about a certain level, typically around 640. If your score is lower, you might have to work with a debt management organization to remediate the problem.
  • Work with a consumer credit counselor. Consumer credit counseling programs are available even if your credit score is lower than required for a debt consolidation loan. Credit counselors work with creditors to lower the interest rates on your bills, sometimes dramatically, and lower the amount of a monthly payment.
  • Get a co-signer. A family member with good credit could co-sign your loan and possibly help get a lower interest rate. But there are risks to co-signing a loan. If you default, that person is liable for what you borrowed, so it’s definitely not a solution for everyone.
  • Join a credit union. Credit unions are more responsive than commercial banks in making loans to their members. They normally ask a nominal fee to join, but the improved interest rate and availability of credit make it worthwhile.
  • Consider a peer-to-peer loan. These loans, which are available online, match prospective borrowers with lenders. Though peer-to-peer lending sites might process your application, these loans typically come from individual lenders who have their own standards, which might include your credit score.

Sources:

Brooks, J., et. al. (2015, January) Excluded from the Financial Mainstream. Retrieved from: http://community-wealth.org/content/excluded-financial-mainstream-how-economic-recovery-bypassing-millions-americans

NA, ND. Credit Scores. Retrieved from: https://www.consumer.ftc.gov/articles/0152-credit-scores

Ratcliff, Caroline, et. al. (2014, July 30) Delinquent Debt in America. Retrieved from: http://www.urban.org/research/publication/delinquent-debt-america

NA (2014, February 18) American Debt Explosion: The Good, the Bad, and the Ugly. Fortune. Retrieved from: http://fortune.com/2014/02/18/american-debt-explosion-the-good-the-bad-and-the-ugly/

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