Payment history is a huge part of your credit score. So finding a bad credit lender that reports your payments can actually help improve your credit.
The main problem with having a low credit score (let’s say anything under 620) is that it cuts you off from traditional sources of credit. Bank loans and regular credit cards are entirely out. And auto loans or mortgage loans are going to come with much steeper interest rates.
If you’ve got bad credit and there’s an emergency expense that needs to get covered, you’ll probably end up with a bad credit loan or a no credit check loan. Certain kinds of bad credit loans can be dangerous, especially ones from a sketchy payday or title lender. But others can actually help your credit!
Here’s what you need to know.
The five parts of your credit score.
When people talk about your “credit score,” they are almost always referring to your FICO score. This is the score created by the FICO corporation using information from one of the credit reports produced by the three major credit bureaus: Experian, TransUnion, and Equifax.
(The credit bureaus can also produce their own credit scores using their VantageScore model. It will probably differ from your FICO score, but not by a lot.)
Your FICO score is graded on a scale from 300 to 850. The higher your score, the better. There are five basic categories of information used to create your score. They are…
- Payment History (35%): This covers your history of paying your bills. This may come as a surprise, but lenders really like it when you pay your bills on-time.
- Amounts Owed (30%): This takes into account the amount of money you owe across all your loans and credit cards. With your cards, it also takes into account how much of your total credit limit is being used.
- The Length of Your Credit History (15%): This covers the length of time that you’ve been borrowing for. A longer history of borrowing–and borrowing responsibly–will help your score.
- Credit Mix (10%): This category looks at the types of credit you use, like personal loans versus credit cards versus student loans, etc. The more diverse your credit mix, the better.
- New Credit Inquiries (10%): This final category takes into account any inquiries you’ve made for new credit within the past two years. Too many recent inquiries can make it look like you are desperate for more credit, which will hurt your score.
Your payment history and your amounts owed combine to make up 65% of your total score. If you have bad credit, it’s likely because of issues in these categories.
“Generally speaking, most people end up with bad credit because they’ve failed to pay their bills on time,” says financial expert and award-winning writer, Holly Johnson. “That could mean anything from being late on their credit card bills to skipping a mortgage payment. Those with the worst credit scores have usually defaulted on some type of bill.”
The key to raising your score.
If you know why your score is bad, you’ll also know what you need to do to fix it. Think of it like going to the doctor when they’re sick. Once the physician knows the cause of your illness, they can prescribe you the proper medicine.
“There are lots of things you can do to improve your credit score,” says Johnson, “but because your payment history comprises 35 percent of your score, the most important thing you can do is pay your bills on time. That means getting and staying current on all your bills including your car payment, mortgage, utilities, and more.”
When you pay a bill owed to a lender, like your bank or your credit card company, they report that information to the credit bureaus. The info gets recorded on your credit report and gets used to create your score. If you have a loan with a lender who doesn’t report to the credit bureaus, then the payment info for that loan won’t affect your score.
Here’s where bad credit loans enter the picture.
Here’s how bad credit loans work.
Simply put, a bad credit loan is a loan that you can get even if you don’t have a good credit score. Some lenders will run a soft check on your credit report during the application process, while other lenders won’t run any check at all. (Loans like that are also referred to as “no credit check loans.”)
Bad credit loans come with higher interest rates than traditional loans—some come with annual percentage rates (APRs) as high as 300 to 400% or even higher! A number of these bad credit loans also have very short repayment terms, requiring full repayment on a monthly or weekly basis.
Some bad credit loans are predatory; this means that the lender seeks to take advantage of their customers, trapping them into an unending cycle of debt. Payday loans and title loans are two common types of predatory bad credit products, where sky-high interest rates and short repayment terms make the loans incredibly difficult to pay off on-time.
Another thing about these predatory bad credit lenders is that their “no credit check” policies go both ways. They won’t run any kind of credit check when you apply for the loan, but they also won’t report your payments to the credit bureaus.
If you end up having to get one of these loans, that loan will not help raise your credit score–no matter how many payments you make on-time.
Some bad credit loans can help your score.
While there are tons of bad credit lenders that won’t report your payment information to the credit bureaus, there are some out there who do.
If you’re looking for a bad credit lender that reports to the credit bureaus, it might be best to look for one that offers installment loans. These are loans that are paid off at regular intervals over a period of months or years. Since installment loans involve multiple payments, they give you more opportunities to pay on-time and have that information added to your credit report.
Of course, a loan is only going to help your score if you are responsible with your payments. Raising your credit score is still ultimately about your ability to responsibly manage your debt and your finances. It’s a long process, and it requires dedication. Short of winning the lottery, you aren’t going to find any silver bullets.
And helping your credit score is definitely not the only reason you want to take out a loan. One of the principles of personal finance is that you shouldn’t be spending more money than you have to, and taking out a bad credit loan will mean paying interest on the money you borrow. That’s extra money that could be put towards paying down your existing debt or building an emergency fund.
Bad credit loans should really only be used for unexpected expenses. Finding one that can raise your score is a pretty great bonus, but it’s not a good enough reason to take one out in the first place.
If you’re looking for a product that can help build your credit score for a relatively low cost (or for no cost at all), then Johnson recommends that you find a good secured credit card. To learn more about how secured cards can improve your payment history, check out this post:
Holly Johnson is a financial expert and award-winning writer who is obsessed with frugality, budgeting, and travel. In addition to serving as Contributing Editor for The Simple Dollar, Holly writes for well-known publications such as U.S. News and World Report Travel, Travel Pulse, Lending Tree, and Frugal Travel Guy. Holly also owns two websites of her own – Club Thrifty and Travel Blue Book – and is the co-author of Zero Down Your Debt: Reclaim Your Income and Build a Life You’ll Love. You can follow her on Twitter or Pinterest @ClubThrifty.
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The information contained herein is provided for free and is to be used for educational and informational purposes only. We are not a credit repair organization as defined under federal or state law and we do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit. Articles provided in connection with this blog are general in nature, provided for informational purposes only and are not a substitute for individualized professional advice. We make no representation that we will improve or attempt to improve your credit record, history, or rating through the use of the resources provided through the OppLoans blog.