Adulting is hard, especially in this economy. It seems as if your income will never be enough to cover your monthly bills, let alone unexpected expenses. If you’ve been neglecting your cash flow, you may constantly be experiencing anxiety each month because of your payables.
Ignoring your cash flow may also result in bad credit, especially if you’ve borrowed money from lenders that you haven’t repaid in full. In turn, this can hurt your credit score, which can significantly reduce your chances of being able to borrow money again.
What Does Having Bad Credit Mean?
Bad credit pertains to an individual’s history of being unable to pay their dues on time. Credit scores are used by financial companies to determine the creditworthiness of users. The premise is that your past behavior can offer insights into your future actions.
Because of this, having a low credit score implies that you might not be able to pay new debts. Therefore, lenders would be wary of letting you borrow money since you’ll be considered as a high-risk for defaulting on the loan.
The side effects of bad credit include having lower borrowing limits and high interest rates. Plus, your credit and loan applications might not be approved in the first place.
As much as possible, you want to reverse your bad credit and earn a good score to increase lenders’ trust in your ability to pay. This factor is useful in staying prepared for health emergencies or other contingencies.
What are Unsecured Loans?
Meanwhile, unsecured loans are a type of loan that doesn’t require collateral. This means that it doesn’t rely on the borrower’s assets, like their homes or cars, to ensure that they pay their debts. Instead, it’s based on an individual’s creditworthiness.
Typically, unsecured loans require higher credit scores since lenders take more risk when they offer this arrangement. Unlike their secured counterpart, these companies can’t run after the borrower’s properties.
How Can Someone with Bad Credit Qualify for Unsecured Loans?
You might be wondering how someone with bad credit can take out an unsecured loan. After all, it does require a high credit score.
Fortunately, there are companies in the market today that aim to help people who are struggling financially. They offer unsecured personal loans for bad credit, which are often processed online. This setup is ideal when you need quick funds for emergencies since the approval and sending of the money are all done digitally.
Even if it’s riskier for the lender to loan money to clients with bad credit, they aren’t totally on the losing end of the bargain. They can still take other actions, like hiring a collection agency to come after the individual that defaulted.
A scarier scenario is that they can legally take the borrower to court. If the latter rules in the company’s favor, the individual’s salary or wages may be garnished.
This means that the money is legally withheld from your paycheck and sent to another entity. Fortunately, the law prevents employers from firing you to avoid processing this type of payment. Garnishments are typically used for unpaid taxes, fines, child support payments, and student loans that have been defaulted. If you’re in this situation and your student loan has become a burden, you can opt for different alternatives by comparing student refinance rates.
A lender can also ask for a co-signer on your loan. It can be scary for the latter since they’ll have to repay the debt if ever you are unable to do so. They also need to have good credit and ample income to pay off the loan.
Tips to Overcome Bad Credit
Since having bad credit can have damaging side effects, you want to work toward improving your financial score. First, you have to determine your credit score.
You can’t take steps to improve your credit rating if you don’t know the exact figure. Check your credit report, which contains information that’s used to calculate your credit scores.
These are the factors that you should take note of:
- Payment History – Your payment history has a significant influence on your credit score. As mentioned above, this is because companies use past behavior to predict your future inclinations.
- Credit Usage – The next most significant aspect is the outstanding debts that you have right now. The amount of money you owe should ideally be less than 30 percent of your total credit limit. Maxing out your lines of credit is an easy way to get a low credit score.
- Credit History Length – The age of your credit lines is also a component for calculating your rating. Someone who’s able to keep their accounts in good standing years after they signed up for them is generally considered financially trustworthy.
- New Credit – Borrowing money frequently is deemed as an indicator of financial pressures. Your score goes down a bit every time you apply for a loan.
- Credit Mix – Having a diverse line of credit, with revolving and installment credit, showcases your ability to manage different types of debt.
There are actually three major credit reporting agencies, Equifax, Experian, and TransUnion. They may impose varied weights on each of these factors, but they generally use these components to calculate your credit score.
After knowing your actual score, you can work your way toward boosting your credit health. The best thing that you can do is to pay your bills on time. This is because lenders want to see that you’re reliable enough to repay your debts according to the period defined on your contract.
Another way is to keep your balances low on credit cards and other revolving credit lines. Remember, maxing out your credit card implies that your income might not be enough to support your lifestyle.
Having bad credit limits your options at the time when you need it the most. Fortunately, there are companies that offer unsecured loans for people who have a history of being unable to repay debts.
You should try your best to improve your credit rating. This means identifying your exact score, which includes knowing the factors that are involved in the calculation. Next, boost your credit score by paying your bills on time and keeping your credit card balances low.