If You Have Bad Credit, a Letter of Explanation Could Help

A letter of explanation could be the difference between getting your loan application approved and having it denied.

This might be surprising to hear, but certain important financial decisions can hinge on something as simple as a letter. That’s right! Letters of explanation are an important part of the lending industry; they allow borrowers to clarify certain items in their financial history, including a bad credit score.

Lousy credit can leave you high and dry when it comes to borrowing money, forcing you to use no credit check loans—like cash advances, title loans, and payday loans—when you have a fiscal emergency. And while there are plenty of safe, affordable bad credit loans out there, they won’t help if you’re looking to rent or buy a home. And that’s where one of these letters of could come in handy.


What is a letter of explanation?

Whoever came up with the name for letters of explanation was a pretty straightforward dude, because that name pretty much says it all. These letters are submitted as a part of a loan application process in order to explain certain aspects of your finances that might otherwise raise a red flag.

Letters of explanation are mostly associated with mortgages, because those loans have an incredibly stringent application process. Talk to anyone who’s in the middle of applying for a mortgage or has just finished applying for one and the half-deranged look in their eyes will tell you all you need to know about that.

These letters are necessary because sometimes there is more to a particular situation than meets the eye. Sometimes perfectly normal transactions can look suspicious if, for instance, they were done in cash; other times a recent change of job or address will trip up underwriters and require clarification.

Basically, lenders just want to confirm that you will be able to afford your loan. Letters of explanation help them get an accurate picture of your finances as they assess your application and decide whether or not to approve you for a loan.

And it’s not just lenders either. Remember that many landlords will check your credit when you are trying to rent from them, so a bad credit score could end up costing you that sweet apartment. Writing a letter of explanation to a prospective landlord or rental company can help your chances of being accepted.

Not all bad credit scores are created equal.

If you have a bad credit score—which is generally considered to be any score under 630—then it’s probably because you have made mistakes managing your credit. You have likely been missing payments, getting accounts sent to collections, or maxing out your credit cards—or some combination of all three!

In cases like these, where there has been a repeated pattern of mismanagement, a letter of explanation probably isn’t going to do you any good. Your credit score is reflecting your use of credit pretty accurately. A traditional lender like a bank or a mortgage company is right to worry. You’ll have to turn your behavior around and build your credit score back up before you can qualify for a regular loan.

However, if there are extenuating circumstances that have lead to your score dropping, a letter of explanation could definitely help. Did you end up in the hospital and your medical bills forced you to declare bankruptcy? Or what about a personal loan that you actually paid off but got sent to collections in error? Maybe you moved cities or states for a better paying job, but you had to put those moving expenses on your credit card.

There are tons of different scenarios where a one-time situation caused your score to drop. And these are the kinds of scenarios where you’ll want to write a letter of explanation where you lay out the situation and—this part is very important—make clear why said situation won’t really affect your finances moving forward.

One position where a letter of credit is a great idea is when there are errors on your credit report. If you are having trouble getting those errors resolved, you will for sure want to send a letter explaining the mix-up. After all, it’s quite literally not your fault that this information is lowering your score. To learn more about fixing credit report screw-ups, check out our blog post: How Do You Contest Errors On Your Credit Report?

5 tips for writing a bad credit letter of explanation.

So, now you know that a letter of explanation can be a useful tool for overcoming a lousy credit score. But a fat lot of good that information will do you without some tips to help you actually write one! Here are five pieces of advice to follow when composing a letter of explanation for poor credit:

Be formal: This is a business communication, not an email to your mom or a text to your bestie. Date your letter and make sure you sign it at the bottom. Also, avoid casual language as much as possible.

Be specific: Think of your letter as answering a very specific question about your finances. Include relevant dates, dollar amounts and your loan application number (if you have one). If you have documentation, include it. If you don’t, say that you don’t.

Be classy: In general, avoid “blaming” other people and companies for what happened to you. Even if what happened to you wasn’t your fault, stick to the “X happened” instead “X did this to me, that stupid jerk.” Take responsibility for the situation and promise better in the future.

Be brief: Your letter should only contain information that is absolutely relevant to matter at hand. With a bad credit score, your letter might be a little longer than a letter concerning a single transaction would be, but still: Make your letter as short as possible while still being effective.

Be honest: This is crucial. Do not lie and don’t ever exaggerate or twist the facts. That will come back to bite you big time. Make sure you cop to the role you played in the events. The more you come across as a straightforward, trustworthy person, the better.

A letter of explanation isn’t a magic wand that you can wave over a denied loan or rental application and magically get it approved. But it is certainly a useful tool for any person looking to borrow money or rent a home. There are so many parts of the great financial machine that are hopelessly complicated. Letters of explanation, on other hand, are just wonderfully simple.

To learn more about living life a lousy credit score, check out these related posts and articles from OppLoans:

Have you ever had to write a letter of explanation? We want to hear from you! Let us know on Facebook and Twitter.

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How to Protect Yourself from Payday Loan Call Scams

Scammers will try to intimidate you and collect on unpaid payday loans that—surprise twist—you never borrowed in the first place!

If you’ve had an unexpected bill pop up and you’re considering a payday loan to cover the cost, think again. Cuz no matter how imposing that bill seems to be, these short-term, high-interest loans could pose an even greater threat to your finances in the long-term. There are better ways to pay for emergency expenses, even if you have to take out a bad credit loan to do so.

But here’s the thing, even if you decide not to take out a payday loan, you can still end up getting taken for a ride. That’s right. A scammer could get ahold of your information and try to collect on a loan you never borrowed. Here’s how payday loan call scammers work, and what you can do to fight back.


What exactly is a payday loan, again?

Payday loans are a type of no credit check loan aimed at folks with lousy credit scores and, more often that not, lower incomes. They’re usually no larger than a few hundred dollars and are designed as an “advance” on the borrower’s paycheck. That’s how they got their name: the due date is usually set for borrower’s next pay day. They’re also called “cash advance” loans for much the same reason.

These loans have an average length of only two weeks but they come with an average APR of almost 400 percent! That’s because a two-week payday loan with a flat-rate interest charge of 15 percent works out to an average annual cost of 391 percent. Those small weekly rates add up over time.

To learn more, check out Payday Loan Rollover: How Short-Term Loans Turn Into Long-Term Debt.

There are two ways you can apply for a payday loan. The first is by walking into payday loan storefront and filling out an application. You’ll know these stores from the giant signs outside that screech “fast cash now!” and “easy cash guaranteed approval!”

The second way to apply is to fill out an application online. You go to the lender’s website, enter your info, and click “submit.” That’s where the trouble starts.

Here’s how the payday loan call scam works.

Many times when you are applying for an online loan, you aren’t actually going to the lender’s website. Instead, you are submitting an application to a lead generator, which then sells your information to lenders looking to get your business.

So even if you don’t end up taking out the payday loan that you’ve applied for, there is a record of your application that contains a whole bunch of personal information, plus how much you were looking to borrow. That record can easily end up being purchased by scammers.

Those scammers then call you and try to collect on a debt you never owed. They pretend that they are a representative from a payday loan company. Sometimes they’ll even say that they’re a lawyer for the company, because getting a call from a lawyer is always intimidating. They might also pretend to be from a government organization.

Once they get you on the phone, that’s when the threats begin. These scammers will use all sorts of low-down tactics to bully you into paying. They will yell and swear at you, they’ll threaten to sue you, to garnish your wages, or have the funds taken out of your account.

They’ll promise to call all your friends and family members and your employer to shame you into paying. They might even threaten to have you arrested! Basically, they will do everything they can to pressure you into paying them. It’s blackmailing a person who never did anything worth getting blackmailed over in the first place.

Protecting yourself from a payday loan call scam.

Remember, these guys (or girls) don’t have anything on you. They are putting on a big show to scare you. If you hold your ground and don’t give in, there really isn’t anything they can do to hurt you. It’s all bark and no bite.

The first thing you should do is ask for written confirmation that you owe the debt. Any caller who refuses to produce one is a scammer. And if they do provide you with a written record, you can check that against your own records. For instance, you can request a free copy of your credit report and see if this collection notice has shown up there as well.

Next, ask for all of the business’s information. Get the caller’s name and the name of their company. Get their address and their phone number too. Scammers don’t want people checking in on them so they won’t give you this information. Some quick research will reveal whether or not they’re a real company. Legit debt collectors on the other hand, will gladly offer it up.

And while you should be collecting all of their info, you should not be giving them any of your own. This is a tip that holds true for all phone scams. Do not give your personal information—account numbers, social security numbers—to anyone who calls you over the phone

Even if this scammer can’t get you to pay this fake debt, they might be able to steal your identity with the information they get from you. Do not let them bully you into giving them what they want. Stand firm and push back.

Lastly, report them. File a complaint with your state attorney general’s office, the Consumer Financial Protection Bureau (CFPB), and/or the Federal Trade Commission (FTC). Local police probably won’t be much help, as the scammer themselves is likely out of their jurisdiction, but these larger agencies might be able to do something.

With their sky-high interest rates and large lump-sum payments, payday loans are bad enough on their own. They don’t need any help. Don’t let one of these scammers turn a moment of desperation into further financial hardship.

To learn more about protecting yourself from scams, check out these related posts and articles from OppLoans:

Have you ever dealt with a payday loan call scam? We want to hear about it! Let us know on Facebook and Twitter.

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“Uh-Oh, I Need Money Now!” 4 Fast Cash Options for People With Bad Credit

There’s no perfect way to get money fast when you have bad credit, but these four choices can all be a good solution—so long as you’re careful.

Realizing that you need cash and need it yesterday is never a fun thought to have. But when surprise expenses or a financial emergency rear their ugly heads, that thought just might sum up your situation. Having an emergency fund for times like these is always the best way to go, but for folks who don’t have one, going on and on about the benefits of saving money isn’t going to help in the slightest.

Instead, you need some fast cash options that are going to help you right now—but that won’t leave your finances hurting in the long-term. And if you have bad credit, that second part can be a very tough ask. Getting the money is easy enough; escaping a predatory cycle of debt is much harder. This doesn’t mean that you can’t get the money you need, it just means that you’ll have to be careful when making your decision.

Here are four ways that you can get fast cash when you need it most. None of these options are perfect—and some are certainly riskier than others—but each of them can be useful in a pinch. No matter which option you choose, make sure you understand all the risks before signing up. Your future self, the one who has to live with consequences of the decision, will thank you.


1. Borrowing money from friends and family.

Look, nobody likes going to their friends and family, hat in hand, and asking for money. Even if they are more than happy to loan you the funds you need, it can still feel really embarrassing. And if they’re less than happy to loan you the money, well, then it feels a whole lot worse.

Still, this is your best option if you need fast cash. For one thing, friends and family are much less likely to charge you interest, which essentially means you’re borrowing that money for free. Plus, they are much more likely to be understanding if your repayment schedule is a little erratic—something that regular lenders tend not to be.

Borrowing money from friends and family, however, does come with some significant downsides. Screwing up your credit is one thing; screwing up your close relationships is something else entirely. Plus, there are lots of people whose friends and family members don’t have any more spare cash than they do, which makes this option a non-starter.

If you’re going to borrowing money in this fashion, make sure that both parties are crystal clear on the terms of the loan. You might even want to draw up your own loan agreement so that you both have something in writing. For a sample contract, and to learn more about this kind of casual borrowing, check out our blog post: How to Ask Friends and Family For Money.

2. Selling or pawning your stuff.

There are two ways that you can do this: You can outright sell your stuff, or you can pawn it with the plan to eventually get it back. Both of these options can be totally fine ways to get some extra cash, though they both have their risks and their downsides.

In order to sell your stuff, you’re probably going to have to do it online. That means using Craigslist, eBay, Facebook, or any one of numerous apps. There’s a lot of set-up involved when it comes to selling stuff online, which is time that you might not have available to spend. Plus, meeting with strangers from the internet is always a risky proposition.

For the most part, you aren’t going to sell your stuff for anywhere near what it’s really worth. And if you wait around for someone who’s willing to pay up, well, you need cash now, not later, right? And the more you are able to sell an item for, the more likely it is to be something you really don’t want to be selling.

Not getting full value will also come into play when you are pawning something. Plus, you’ll have to pay interest in order to get your item back. While most pawn shop loans are only a month-long, many of them will let you extend for several months at least. That means even more interest piling up.

If pawn shop loans had really low interest rates, this wouldn’t be so much of a problem. But they do. Pawn shop loans can have an average rate anywhere from 15 to 275 percent depending on the laws in your state. Yikes! To read more about pawning your valuables for some quick cash, head on over to our blog post: The Pros and Cons of Pawn Shop Cash Advances.

3. Take out a cash advance on your credit card.

Now, if you need emergency money and it doesn’t matter if it’s cash or not, then you can put the balance on your credit card. But this only applies if you already have a credit card with a low outstanding balance. Generally, you want to keep your credit card balances below thirty percent, but when an emergency strikes, you might not have any better options available.

If you don’t already have a credit card, however, then a poor credit score is going to limit your options for getting one. You might only be able to apply for a secured credit card, but that will require a cash deposit to set your credit limit, putting you right back where you started. Besides, it can take that card awhile to arrive, and by then it might be too late.

For emergency expenses that require cash, taking out a cash advance on your credit card might be your best bet. That doesn’t mean it doesn’t carry significant risks to your financial health, it just might be the least-bad option you have.

Credit card cash advances work a lot like using your debit card to get cash from an ATM. The main difference is that cash you get on a debit card is money you already have in your bank account, whereas a credit card cash advance is money that you’re borrowing. When you get an advance on your credit card, the amount you withdraw is then added your outstanding balance, just like when you use your card to make a purchase.

The biggest downside to credit card cash advances is that they are more expensive than regular credit card purchases. They come with an upfront fee just for making the transaction that averages $10 or 5 percent of the amount withdrawn, whichever is higher. The APRs for cash advances are also much higher than the APRs for regular transactions, and the lack of a 30-day grace period means that interest starts accruing immediately.

Lastly, there limits on credit card cash advances that, depending on the card, might be lower than the amount you need. These might be limits on the amount that you can withdraw per day or per transaction; your card also likely has an overall limit for cash advances. Even if a credit card cash advance is the best of your bad options, they’re still putting your finances at risk.

4. Shop around for the right bad credit loan.

When you have bad credit, you are likely going to be locked out of loans from traditional lenders. When they look at your credit score, what they see is a high likelihood that you won’t be able to pay them back. Instead, you will have to take out a bad credit loan that will come with much higher interest rates.

Still, some bad credit loans can be a great financial solution! So long as you can afford your payments, a higher interest rate can be an acceptable price to pay for access to credit you wouldn’t otherwise have. It’s all about finding the right bad credit loan and making sure you steer clear of the wrong ones.

There are three main types of bad credit loans out there, two of which should be avoided at pretty much all costs. payday loans and title loans risk trapping you in a predatory cycle of debt, while certain bad credit installment loans can actually help you improve your overall financial health.

Payday loans are a very common kind of short-term, small-dollar loan aimed at people with bad credit. They’re rarely larger than a few hundred dollars and are designed as an advance on the borrower’s next paycheck. The loan is often due on the customer’s next payday—that’s where the name comes from.

The average term for a payday loan is only two weeks, and the average interest charge for one of these loans is around $15 per $100 borrowed. That might seem like a reasonable cost, but it actually works out to an APR of 391 percent. Paying 15 percent to borrow money for only two weeks makes these loans much more expensive than standard personal loans.

The trouble with payday loans, however, isn’t just their cost; it’s the size of their payments. Payday loans are designed to be back in a single lump sum (principal plus interest) that can be very difficult for many people to afford. Only two weeks to pay back several hundred dollars can be tough when you don’t make that much money.

Trouble making those payments leads to some payday loan customers rolling over their loans, paying off the interest and getting an extension on their due date with even more interest added on. Customers can also reborrow their payday loans—paying off the original loan and then immediately taking out a new one to cover their other bills.

All of this can add up to a cycle of debt wherein the customer is trapped paying more and more interest on their loans without ever getting closer to paying off the loan itself or getting their finances stable enough where they don’t need a loan at all. Payday loans might seem like a good fit for short-term financial needs, but too often they end up presenting a long-term problem.

Title loans are another type of short-term no credit check loan, and they might even be more dangerous than payday loans. These loans get their name from the thing that they use as collateral: the title to borrower’s car, truck, or motor vehicle.

Since these loans use the borrower’s car as collateral, customers are often able to borrow more with a title loan than they could with a payday loan. But most title lenders will still lend their customers only a fraction of their vehicle’s true value. And if the person can’t pay it back, then the lender can repossess their car and sell it.

So how affordable are title loans? Well, Your average title loan has a repayment term of one month, and a monthly interest rate of 25 percent. Some quick math reveals that a 25 percent monthly rate adds up to an APR of 300 percent! Like payday loans, many title loan borrowers end up rolling over their title loan again and again, racking up thousands of dollars in fees and interest.

In the end, title loans don’t just put your finances at risk, they could endanger your very livelihood. Lots of folks out there need their cars in order to get to work, so having their car repossessed could very well lead to them getting fired. And according to the Consumer Financial Protection Bureau, one in five title loans ends in repossession. That number and those interest rates are much too high for a title loans to be a viable option.

Installment loans work a lot like regular personal loans. They are designed to be paid back in a series of regularly scheduled payments over a period of months or years. This gives them a leg up on payday and title loans, whose lump-sum payments make them far more difficult to pay back on time.

The main difference between regular loans and bad credit installment loans is the interest rates. And while these bad credit loans have much higher interest rates than regular loans, there are many installment lenders (like OppLoans) whose rates are much lower than the average payday or title lender.

What’s more, most installment loans are amortizing, which means that every payment you make goes towards both the principal and the interest. And since interest accrues on these loans over time—instead of being charged as a flat fee per loan period—paying your loan off early will save you money!

Overall, a long-term installment loan is a much better option than a short-term payday or title loan. Their payments are often more affordable, their principals are higher, and they let you save money by paying ahead of schedule. Plus, some installment lenders report payment information to the credit bureaus. That means that paying your loan back on-time could help your credit score!

But don’t let the relative security of an installment loan lull you into a sense of false security: You still have to make sure to do your research. There are a lot of untrustworthy lenders out their offering bad credit installment loans. Check out customer reviews and the lender’s BBB page, compare rates between lenders, and don’t sign anything before you fully understand the terms and conditions.

The best way to deal with emergency expenses is to already have money set aside. A well-stocked emergency fund will give you an interest-free solution to any surprise bills that come your way. But saving money is hard, especially if you’re living paycheck to paycheck. If you need fast cash, there are always solutions out there. It’s just about finding the one that’s right for you.

To learn more about living life with a bad credit score, check out these related posts and articles from OppLoans:

What did you do the last time you need some fast cash? We want to hear from you! Let us know on Facebook and Twitter.

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If You Have Bad Credit, Can You Qualify for a Debt Consolidation Loan?

If you want to consolidate your debt but you have a lousy credit score, you’re going to run into the same problems as you would trying to apply for any other loan.

Bad credit is like the worst kind of slope: a slippery one. Once you miss some payments, your credit score will start dropping and the fees and interest on that debt will keep growing.

So now you have more debt and a lower credit score which will make getting a personal loan harder. One way to help manage your debt is to take out a debt consolidation loan, where you get one big loan to pay off all your smaller ones. Then you only have one payment to make every month! And hopefully at a lower interest rate than you were paying previously!

But if you already have a poor credit score, is debt consolidation really a possibility for you? Read on and find out!


Payment history and amounts owed are the two most important parts of your score.

Before we continue, let’s make sure we’re all on the same page. Your history as a borrower is collected into documents called credit reports by the three major credit bureaus: Experian, TransUnion, and Equifax. That information is then fed through an algorithm created by the FICO corporation to create your credit score, a three-digit number that expresses your perceived trustworthiness as a borrower. Potential lenders use these scores to help determine whether they’ll lend to you and at what rates.

Your credit score is composed of five categories. The most important category, worth 35 percent of your total score, is your payment history. This is a measure of whether you’ve been paying your bills and paying them on time. When it comes to whether you’re likely to pay off your debts in the future, it’s not surprising that lenders will want to know whether you’ve paid your debts in the past.

The next factor, worth only a little less at 30 percent, is your amounts owed. This is, as the name suggests, the amount you currently owe to your various lenders. If you already have a lot of debt to manage, it stands to reason that you’ll have a tougher time managing new debt. In general, you’ll want to keep any credit card balances below 30 percent of your total credit limit to help this section of your score.

If you think you have a good credit score because you’ve never been in debt, you’re wrong. 

The last three factors are each less important on their own, but together they account for a little over a third of your credit score, as the math would suggest.

The length of your credit history is worth 15 percent. This is where some people can get hung up because they think having never gotten into debt in the first place will lead to a good credit score. That’s not the case. FICO’s algorithm does not look too kindly on people who’ve never borrowed money before because, well, they’ve never borrowed money before! The algorithm isn’t sure how they would handle it!

That’s why, even if you don’t qualify for a regular credit card, you should consider getting a secured credit card. This is a card that’s easier to qualify for but which requires you to put down cash as collateral. That way, you can start building up your credit by using the credit card and paying the bill in full each month. But you don’t want to use it too much since the next 10 percent is …

Your credit mix! This takes into account how your credit obligations are divided. Lenders want to see as diverse a mix as possible. So if all your debts are on credit cards or in the form of personal loans, you’ll get dinged for that.

Finally, the last 10 percent is recent credit inquiries. Hard credit checks, performed by most standard financial companies when you’re seeking a loan, will cause a temporary negative effect on your credit score. The effect isn’t huge and will only last a maximum of two years, but when you have bad credit, every little bit counts.

What is a debt consolidation loan, exactly?

Speaking of applying for a loan, just what is a debt consolidation loan? Basically, it’s a loan you take out for the express purpose of paying off the debts you want to consolidate. You take out the new loan, and then use those funds to pay your old debts off. There are certain loans that are advertised specifically as debt consolidation loans, and you include the other balances that you want to pay off as a part of the loan process.

Ideally, this new loan will have lower rates than the original loan or lower monthly payments. Or super duper ideally, both. Oftentimes, though, you’ll be asked to choose between the lower monthly payments and paying more in interest overall—even with lower rates. A longer term on a loan means lower payments, while a shorter term means less interest will accrue. In choosing between the two, it’s really about what’s right for you.

If you’re applying for a debt consolidation loan that has a higher interest rate than your current debts or monthly payments that you can’t afford, then you shouldn’t take out that loan. While simplifying your debts is a good thing—allowing you to make one payment each month instead of many—paying more money in order to do that is not.

So can you get a debt consolidation loan with bad credit? And should you?

Folks with bad credit will run into the same issues with a debt consolidation loan that they will with regular loans.

Getting a debt consolidation loan with bad credit is like getting any other loan with bad credit: less than ideal. Traditional lenders likely won’t lend to you at all, and the ones that will are going to charge you much higher interest rates. The rates might be so high that the loan isn’t even worth it. Loans or credit cards that were taken out before you had a bad credit score might have better rates than anything you’re able to qualify for right now.

You’ll also want to be very careful with any lender that does want to lend to you when you have bad credit. While there are many bad credit lenders out there that are totally legit, there are many others whose predatory products will trap you in a cycle of debt. Trying to consolidate your debt with one of these lenders could leave you in a worse situation than you were in before the consolidation.

Then again, even the higher rates from one bad credit loan might be far better than what you’re paying on your other bad credit debt. For instance, if you have multiple payday loans outstanding that you are struggling to pay, consolidating all of those loans into a single bad credit installment loan with longer terms and lower payments might just be the ticket to stabilizing your finances.

The solution to choosing the right bad credit debt consolidation loan is simple: Do your research. Make sure you compare different loans using their APR, or annual percentage rate, to determine which one is most affordable, and make sure to read all of the fine print before signing anything. Check the monthly payment amounts against your budget and see whether or not you’ll be able to afford them. Online reviews can also help you determine which lender is the right choice for you.

In a best-case scenario, you’ll find a debt consolidation loan with better terms that will report your payments to the credit bureaus. Then, not only will you be handling your debt, you’ll be building your credit score back up as well!

Having a bad credit score is always going to be tougher than having a good one. But it might still be worth looking into a debt consolidation loan. As long as you don’t have to agree to any hard credit checks, there isn’t a downside to exploring your options.

To learn more about getting out of debt, check out these related posts and articles from OppLoans:

What do you think is the best strategy for getting out of debt? Let us know on Facebook and Twitter.

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Make Sure Your Bad Credit Loan Has Payments You Can Afford

bad-credit-payments-you-can-afford

Short-term loans that require lump-sum repayment are very difficult for most people to repay on time, trapping them in a predatory cycle of debt.

There’s no perfect solution for borrowing money. No matter what decision you make, every single loan or credit card you take out is going to have downsides—or at least some manner of risk. Even borrowing money from friends and family isn’t a perfect solution. The dangers might be more social than financial, but failing to pay that money back could still get you in big trouble.

When you’re borrowing money and you have bad credit, however, those solutions get even less perfect. Personal loans and credit cards get more expensive and the risks become greater. Lots of bad credit loans out there could even trap you in a predatory cycle of debt. A poor credit score gives you fewer lending options, which means certain lenders can and will take advantage of you.

It’s a bit difficult to boil down any lending decision to a single factor, but with bad credit loans (and any loan, really) there is one element that stands head and shoulders above the rest. If you’re going to take out a bad credit loan, make sure that it has payments you can actually afford. If you take care of that, most everything else should fall into place.


What is a bad credit loan?

In basic terms, bad credit loans are the types of loans available to people with poor credit. While there is no exact definition of a “bad” credit score, it’s safe to say that any score under 630 qualifies as subprime or poor credit. People with scores in this range will not be able to take out personal loans from traditional lenders, as they are seen to be far too risky.

Bad credit loans have much higher interest rates than traditional loans. This is because borrowers with poor credit scores default at a higher rate than borrowers with high scores. (Your credit score essentially sums up your reliability as a borrower, so this isn’t surprising.) Bad credit lenders have to charge higher rates because they need to account for all the loans they issue that won’t get paid back.

Still, that reality does not excuse the absolutely astronomical rates that some of these lenders charge. And by designing their loans to be paid back all at one time, many bad credit lenders make their products even more difficult to repay.

What are the different types of bad credit loans?

There are four main types of bad credit loans: payday loans, title loans, pawn shop loans, and installment loans. The first three are all “no credit check loans,” which mean that they do not check a customer’s score before lending to them. Some installment lenders also do not perform a credit check, but many others perform a “soft” credit check. These checks do not return as much information as a “hard” check, but they also don’t affect your credit score.

Payday loans are short-term small-dollar loans with an average repayment term of only two weeks—in theory, they are designed to tide the borrower over until their next paycheck, hence the name. While the rates for payday loans seem reasonable, they add up to an average APR that’s well over 300 percent. For instance, a 15 percent interest charge for a two-week payday loan translates to an APR of 391 percent. Payday loans are designed to be paid off in a single lump sum, and are sometimes referred to as payday “cash advances.”

Title loans have a typical repayment term of one month and an average APR of 300 percent. Unlike payday loans, which don’t require any collateral, title loans are secured by the title to the borrower’s car or truck. Despite only giving borrowers a fraction of the value of their car, title loans usually have higher loan amounts than payday loans. If a customer cannot pay back their title loan, the lender can repossess the vehicle and sell it to cover their losses.

Pawn shop loans are another type of secured bad credit loan. For collateral, they use a person’s valuables, stuff like jewelry and electronics. Pawn shop laws vary widely from state-to-state, but the standard term for a pawn shop loan is one month. The APRs for these loans can vary anywhere between 15 and 240 percent. Like title loans, failing to pay back a pawnshop loan means forfeiting your collateral.

Installment loans are structured more like traditional personal loans. Instead of being paid off all at once like payday, title, and pawn shop loans, installment loans are paid off in a series of regular payments. The rates for installment loans are oftentimes lower than payday loans, though this varies from lender to lender. Many installment loans are amortizing, which ensures that every payment goes towards paying off both the interest and the principal.

Lump-sum repayment makes many bad credit loan payments unaffordable.

Here’s a thought experiment: If you took out a $400 payday loan, and two-weeks later you had to pay back $500. Would you be able to afford that? Even with an upcoming paycheck to draw from, coming up with that much money at once would be difficult. And if you could make that payment, there is a good chance that it would dramatically impact the rest of your budget. The hole it makes might be so big that you end up having to take out another payday loan to cover your bills.

Unfortunately, this isn’t a thought experiment for millions of Americans. It’s a reality. According to a study from The Pew Charitable Trusts, only 14 percent of payday loan borrowers have enough money in their monthly budgets to afford their loans. This shortfall is partly due to the loans’ lump-sum repayment terms, which force borrowers to pay their loan off all at once.

The same can be said for title loans, but with even more dire consequences for borrowers who cannot repay. In many states, payday and title lenders are allowed to roll over their customers’ loans, which means that they charge the borrower additional interest to extend the loan’s due date. Borrowers usually have to pay the interest already owed on the loan, but that payment doesn’t actually reduce the total amount that they owe. Others pay their loan off and then immediately take out a new loan to pay for necessary expenses.

An installment loan is probably your best option.

This cycle of rolling over or reborrowing a loan quickly turns into an outright cycle of debt; consumers have just enough money to pay off the interest owed on the loan, but not enough to pay down the principal. By extending the due date over and over (or taking out new loans soon after they pay their old ones off), these victims of predatory lending find themselves trapped in a system that slowly sucks their bank account dry.

These people would be better off with a bad credit installment loan. Instead of being stuck paying only the interest on their loan, every payment they make would go towards principal and the interest. The more payments they make, the less money accrues towards the interest, which means that a larger and larger portion of each payment goes towards the principal. Also, with smaller payments made at regular intervals over a longer period of time, there is much better chance that those payments will fit into the borrower’s budget.

Of course, an installment loan with unaffordable payments isn’t a great idea either, so you should make sure to do your research before taking out any kind bad credit loan. Check out the customer reviews and the BBB page for any lender you’re considering, no matter if they’re a storefront lender or a website with online loans.

While an installment loan will likely be more affordable than a payday or title loan, it all comes down to what your budget will allow. Any loan that has payments beyond what you can manage is a one-way ticket to a cycle of debt or even bankruptcy.

To learn more about living with bad credit, check out these related posts and articles from OppLoans:

Have you ever found yourself trapped in a cycle of debt? We want to hear from you! You can email us or you can find us on Facebook and Twitter.

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN

How Does Going to Prison Affect Your Credit?

how-does-prison-affect-creditGetting sent to prison will make it very hard to repay any money that you owe, and that’s going to hurt your credit score.

There are a lot of people in prison in America. In fact, our country has a higher prison population and higher incarceration rates than anywhere else in the world. And while there’s clearly a lot of work that needs to be done to bring down incarceration rates, a lot of that is a bit outside our wheelhouse. We’re more focused on helping your personal financial situation right now.

That’s why we’re here to answer a question you may, unfortunately, have wondered about: How will going to jail affect your credit score?


How do credit scores work, again?

First, let’s just go over what a credit score is and how it works.

Your credit score is a three-digit number produced from information on your credit report. You actually have three credit reports, each from one of the three major credit bureaus, Equifax, Experian, and TransUnion. Your score will differ depending on which credit report is used to create it.

The bureaus take information about your lending and credit use and create a three digit number that summarizes your reliability as a borrower. Potential lenders then use that score to determine how likely you are to pay back your loans on time.

Lenders and other creditors determine whether they will lend to you and at what rates based off this number. If the number is at 800 or above, you’ll get the (relatively) royal treatment, but if it’s below 700, you might start running into trouble. And if it’s below 630, then watch out.

In general, the most reliable way to get your credit score up is by using a credit card responsibly. That means using it regularly, but keeping it under one-third of your total credit limit and making sure to pay your bill in full every month. If you only pay the minimum each month, the interest will keep accumulating, and that debt will weigh down your credit score.

But all of this is day-to-day information for life on the outside. How will your credit be impacted by time behind bars?

Prison means no income to pay your debts

While a conviction and jail time may not directly destroy your credit score, all of the secondary effects are going to be an enormous weight.

“Criminal convictions and sentences are not automatically reported on a credit report (only a police report will include such information),” advised attorney Paul Mitassov. “Therefore, most credit score effects are indirect.”

Prison is also unsurprisingly bad for your job prospects in all sorts of ways, as Mitassov explained: “Being in jail will usually stop a person from being able to work and earn money. This will limit their ability to pay their existing obligations, which will be reflected poorly on a credit report. A criminal record will affect a person’s ability to find a job. Jail time will usually cause them to lose their previous job. Lacking a job (and the income it brings) will hurt your credit.”

Your assets can get seized as well. 

And it gets worse.

“Some or all of a person’s resources (money, vehicles, tools, etc) may be seized on arrest,” Mitassov warned. “These may not be returned for some time (or at all). The lack of such assets can prevent one from paying. Most accused will try to hire a lawyer as soon as possible. Criminal lawyers usually request large up-front retainers. This (presumably) unexpected expenditure can prevent a person from paying their other bills.”

Even keeping up with your regular payments could become impossible, as Mitassov told us: “Not all prisons have facilities for easy bill paying (i.e. easily accessible phones or computer terminals). Even if an inmate has the funds, he may find it difficult to arrange regular payments.”

So now that you’ve been warned, you know what to prepare for should you ever find yourself incarcerated.

But what comes after?

How to build your credit post-prison.

So prison is going to be hard on your credit (let alone every other aspect of your life) but how can you bring your score back up otherwise? It’s a lot like what you’d do otherwise but with a much higher level of difficulty.

“Pay off your outstanding obligations, or get them discharged via bankruptcy (bankruptcy is terrible for your credit rating, but at least it stems the bleeding),” suggested Mitassov concerning post-prison release to get your credit score back up. “Get a job. You need an income, to pay your obligations. Make sure to assume only manageable obligations, and make sure to pay on time. (i.e. to build up a good payment history).”

If there were debts you weren’t able to pay because of your incarceration, you can try getting in touch with the creditors and finding out if you can negotiate some sort of agreement.

In general, creditors would rather get some money than no money, and if you can get some of your debts settled or partially forgiven, you’ll already be on your way to better credit. If you can’t qualify for a traditional credit card after release, you can get a secured credit card, which requires you to put down some cash as collateral but can be a good way to build up your credit. Unlike no credit check loans, like payday loans or cash advances, most secured credit cards will report your payment activity to the bureaus.

It’s hard enough to maintain your credit score without going to jail, but with some dedication and a willingness to ask for help when you need it, you can put yourself on the path to credit redemption.

To learn more about credit scores, check out these related posts and articles from OppLoans:

What other questions do you have about credit scores? We want to hear from you! You can email us or you can find us on Facebook and Twitter.

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN


Contributors

Paul Mitassov graduated from the University of Toronto Faculty of Law in 2013. He also holds a Bachelor’s Degree in Mechanical Engineering from the University of Toronto. After working at a downtown law firm, he started his own practice in North York. As an engineer, Paul takes an analytical approach to every case, and has obtained results in various areas of law including civil litigation (including small claims), family law, wills and estates, corporate law, and criminal matters.  Paul’s dedication to perfection and transparency with his clients are the number one reason why most of our client’s come from prior client referrals. Paul speaks fluently in both Russian and English, and is a fully-licensed lawyer with the Law Society of Ontario.

Are Payday Loans and No Credit Check Loans the Same Thing?

payday-loans-no-credit-check-loans

Payday loans don’t require any kind of credit check, but they are one of the riskiest kinds of no credit check loans out there.

When you’re dealing with an emergency, it can be hard to pay attention to details. Your adrenaline is pumping, your nerves are shot, and a lot of the information you encounter just washes over you. Before you know it, you’ve been staring at the same form for 10 minutes, reading the same paragraph over and over, not retaining any of it.

If you don’t have an emergency fund to cover unforeseen expenses, this adrenaline-fueled brain fog could get you in trouble. Even though you think you know a lot about fast cash loans, you could easily end up in the clutches of a predatory lender, all because you didn’t understand the kind of loan you were signing up for.

For instance, you might have bad credit and need a loan that doesn’t do a credit check. You see an ad for payday loans online and you wonder if this is the kind of no credit check loan you should be applying for. What’s the difference between a payday loan and a no credit check loan, anyway? Are those just two names for the same thing? Don’t’ worry, that’s exactly what we’re here to fill you in on.


What is a no credit check loan?

It’s right there in the name: no credit check loans are products that don’t require a credit check with your loan application. Specifically, they do not require a hard credit check, wherein a lender requests a full copy of your credit report. Hard credit checks also get recorded on your credit report and can ding your score for up to two years.

Some no credit check lenders might still perform what’s called a “soft” credit check when you apply for a loan. Similar to a hard check, a soft credit check returns info about your borrowing history. Unlike a hard check, however, a soft check returns much less information and does not affect your score. Some lenders might also ask for proof of employment and/or copies of your bank statements to confirm that you draw a paycheck.

No credit check loans are a type of bad credit loan. These are products designed for people whose poor credit scores lock them out from traditional personal loans. Bad credit loans come with much higher interest rates than loans from regular lenders, but they also give critical access to credit for borrowers who otherwise wouldn’t have any access at all. Still, there are many no credit check loans that can be outright predatory, designed to trap borrowers in a constant cycle of debt.

What is a payday loan?

Payday loans are a type of small-dollar no credit check loan, which means that payday lenders do not check your credit when you apply for one of their loans. They are very short loans, with an average repayment term of only two weeks—the idea being that the loan will be repaid on the day the borrower receives their next paycheck. That’s where the name “payday loan” comes from.

The standard process for a payday loan looks like this:

A customer walks into a storefront and asks for a loan. The lender then either takes a postdated check from the customer for the amount borrowed plus interest or they sign the customer up for an automatic withdrawal on the loan’s due date. They then hand the customer cash and the customer walks out the door. Two weeks later, the payday lender deposits the check or withdraws the funds from the customer’s bank account.

While the cost of a payday loan varies from state to state, they have an average annual percentage rate (APR) of almost 400 percent. And while those high annual rates don’t matter so much if you pay your loan off on-time, many payday loan customers find that they have trouble doing just that.

Some payday lenders even allow borrowers to roll their loan over, extending the due date in return for paying additional interest. In other cases, payday loan customers will have to pay their loan off and then immediately take another out to cover additional expenses.

Loan rollover and reborrowing can easily turn into a predatory cycle of debt wherein the customer keeps paying more and more interest towards the loan without ever paying any of the principal amount they owe. That’s how a 15 percent interest-charge on a two-week payday loan can add up to an annual rate of 391 percent.

How are payday loans different from other no credit check loans?

There are many different types of no credit check loans, and payday loans are one of the most common types. Still, there are ways in which payday loans differ from other no credit check loans. Some of these differences make payday loans a better option, but many others make them one of the riskiest types of no credit check loans out there.

Payday loans generally have the shortest payment terms of any no credit check loan. Title loans, for instance, have an average term of one month. While the short terms for payday loans might seem convenient, that quick turnaround can make them extremely difficult to repay on-time. And while no credit check installment loans let you pay your loan off a little bit of a time, payday loans have to be paid off in one lump sum, which can add to the hardship.

You can’t borrow as much money with a payday loan as you can with other types of no credit check loans, which can be both a plus and a minus. Smaller amounts of money mean that a payday loan can’t be as helpful in an emergency, but it does mean that you’ll have to repay less money overall. Meanwhile, an installment loan with manageable payments lets you borrow more money overall while keeping your loan payments affordable.

Unlike payday loans, which have no collateral requirements, title loans are secured by the title to your car or truck—that’s how they got their name. Using your car as collateral means that you can usually borrow more with a title loan than you can with a payday loan, but it also means that your car can (and likely will) get repossessed if you can’t pay the loan back on-time. Say what you will about payday loans, you won’t lose your car if you default on one.

There are better options than a payday loan.

All in all, payday loans carry many risks, so many risks that you should avoid taking one out if at all possible. Putting money on your credit card is a better option than taking out a payday loan. even taking out a costly credit card cash advance will still leave you paying much lower interest rates.

Title loans should also be avoided, but a responsible bad credit installment loan (especially one that performs a soft credit check that won’t affect your credit) can be a great way to pay for emergency expenses. There are plenty of online loans out there that fit your needs—just make sure you do your research first! Do it now, so you’ll be prepared later on when you don’t have time think.

Not all no credit check loans are payday loans, but payday loans are certainly one of the riskiest types of no credit check loans you can find. To learn more about borrowing money with bad credit, check out these related posts and articles from OppLoans:

What has your experience been with payday loans? We want to hear from you! You can email us or you can find us on Facebook and Twitter.

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN

Yes, You Might Need a Credit Check to Rent a Car

credit-check-rent-a-car

Car rental companies see debit cards as a red flag and will likely check your credit before they rent to you.

If you have a bad credit score, there are tons of ways that you’ll feel its effects in your everyday life. It will mean higher interest rates on your loans and credit cards, which cuts into your monthly budget. It might also mean paying more for utilities or at least needing to put down a deposit in order to secure them. It can even mean getting turned down for an apartment or a new job.

In short, having bad credit sucks. Luckily, there are things that you can do to help your score improve, like paying down your debts and making sure you pay your bills on time. Additionally, you should avoid any unnecessary credit checks, as they can negatively affect your score for up to two years. The damage won’t be that huge—more of a dent than a smoking crater—but when your score is in the dumps, every little bit can help or hurt.

Avoiding credit inquiries means not applying for loans or credit cards unless you absolutely need them, but it can also mean avoiding other things as well—or at least approaching them more cautiously. One of those things is renting a car. Depending on your circumstances, renting a car might mean needing a credit check, which could lower your score. And the answer to avoiding that check might surprise you.


How do credit checks work?

When a business checks your credit, it’s because they want to see whether you are a trustworthy borrower. While renting a car is a little different than taking out a loan or a credit card, the same basic rules apply. If you have a history of paying your bills and your rent on time, you are very likely to also pay for your rental car without any issues.

There are two types of credit checks that can be run: hard checks and soft checks. A hard credit check pulls a full copy of your credit report from one of the three major credit bureaus (TransUnion, Experian, and Equifax). Hard checks are also recorded on your report and will usually ding your score temporarily. In order for a hard check to be run, a company must have your express permission.

Soft credit checks, on the other hand, do not need your permission in order to be run. This is because soft checks return far less information than hard checks. And while soft checks can be recorded on your credit report, they do not affect your score. If you’ve ever received a “pre-approved” offer in the mail, that lender performed a soft check on your credit history.

With car rentals, they will perform a hard check on your credit. If you want to read more about the difference between soft and hard checks, check out our blog post: How are Soft Credit Checks Different From Hard Checks?

Renting a car with a debit card could mean a credit check.

On this blog, we write a great deal of personal finance advice. And one thing we consistently tell folks who lack good money habits is to avoid using their credit cards as much as possible. Credit cards with a good points or rewards plan can be a great financial tool if used properly, but the temptation to use them improperly and rack up a bunch of debt is too strong for many people.

So it feels a bit odd to say this but here we go: If you’re renting a car, you should do it with a credit card instead of a debit card. It’s only when customers are using a debit card that companies are going to (often, but not always) insist on running a credit check.

Debit cards mean additional risk for car rental companies.

Why do these companies insist on checking credit with a debit card? Well, most rental companies see debit cards as a bit of a red flag. With debit cards, they are much more likely to run into problems with insufficient funds to cover either the rental itself or additional costs that the renter might occur by damaging the car or forgetting to fill up the tank before they return it.

Still, this debit card red flag isn’t big enough to stop car rental companies from renting to debit card-users altogether. Instead, they simply need to run a credit check on the borrower before handing over the keys—in addition to a number of other small ways they try to disincentivize borrowers from using debit cards.

Beyond a credit check, renting a car with a debit card could mean needing additional ID, providing proof of insurance, having certain car classes made unavailable to you, and even certain age restrictions. In short: renting a car with a debit card is a hassle. If you need to rent a car, use a credit card.

To learn more about how credit works, check out these related posts and articles from OppLoans:

What else do you want to know about credit checks? We want to hear from you! You can email us or you can find us on Facebook and Twitter.

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN

Will a Cash Advance Show up on Your Credit Report?

While a cash advance won’t necessarily show up on your credit report, there are still ways that taking one out could hurt your credit score.

When you need cash during an emergency—and you don’t have an emergency fund—it’s easy to only think about the short-term. Who cares how much this sketchy online loan from RealLoansNotaScam.com costs? Forget that this “lender” you found on Craigslist is literally a guy handing wadded-up ones out of the back of a Winnebago—you need cash and you need it now!

And yet, those long-term considerations can really come around to bite you in the behind, so they are good to keep in mind. Take cash advances for example. If you take one out, will it end up on your credit report? How will it affect your score? What even is a cash advance anyway?

That’s why we’re here. So sit back, take a deep breath, and remain calm as we answer your questions about cash advances, credit reports, and how the two relate.


How do credit reports work?

Credit reports are documents that contain a record of your borrowing history. They include stuff like outstanding balances, history of on-time payment (and any late or missed payments), the types of loans and credit cards you’ve taken out, accounts that have been sent to collections, bankruptcy filings, hard credit checks, etc. Most of the information on your credit report remains there for seven years, although some information, like bankruptcies, will stay on your report for longer.

These reports are created and maintained by the three major credit bureaus: Experian, TransUnion, and Equifax. Since some lenders, debt collectors, landlords, etc. might report consumer data to some but not all of the bureaus, information can vary across the reports. For this reason, you don’t actually have one credit report; you have three. And your credit score can change depending on which credit report was used to create it.

What is a cash advance?

There are two types of cash advances. The first type is a feature on your credit card, where you can use the card to take out cash. The amount of cash that you withdraw (plus an extra fee and any ATM fees you might also incur) is then added to your credit card balance in the same way that a regular purchase would be added.

Aside from the additional cash advance fee, credit card cash advances differ in a couple key ways from regular credit card transactions. First, they come with a higher APR than standard transactions. Second, there is no 30-day grace period for interest on these transactions; once they are added to your balance, interest starts accruing immediately. All in all, taking out a cash advance on your credit card is a good deal more expensive than simply using your card to make a purchase.

The second type of cash advance is a type of short-term no credit check loan. Similar to payday loans, these cash advance loans are advertised as being an “advance” on the borrower’s next paycheck. The typical repayment term for these loans is approximately two weeks, after which time the loan is to be repaid in a single lump sum—unlike traditional installment loans, which are paid off in a series of smaller payments over time.

The interest rates for these payday cash advances are extremely high, with an average APR over 300 percent. While their interest rates look reasonable in the short-term, the difficulty that many customers have repaying these loans can often mean rolling their loan over or paying it off and immediately borrowing a new one. The more that a person rolls over or reborrows their loan in order to make their payments, the more likely they are to become trapped in a predatory cycle of debt.

Are credit card cash advances added to your credit report?

The answer to this question is: kinda. Anytime you add (or subtract) from your credit card balance, that change is noted on your credit report. So a credit card cash advance will show up on your report as an addition to your credit card balance, but it won’t be noted any differently than a regular transaction would be.

So can a credit card cash advance negatively affect your credit? It can, but it’s not likely to. When it comes to your credit card balances, it’s a good idea to keep them pretty low relative to your total credit limit—even if you pay off your balances in full every month. Keeping your debt utilization ratio beneath 30 percent (meaning that you never spend more than 30 percent of your credit limit) will mostly keep those balances from negatively affecting your credit.

In order for a credit card cash advance to negatively affect your credit score, it would have to either push your balances above 30 percent or it would have to be such a massive increase to your balances that it would reflect a major change to your total amounts owed. Unless you are right beneath that 30 percent ratio or are taking out thousands of dollars worth of cash advances in a short period of time, your score will be unaffected.

Will a payday cash advance loan show up on your credit report?

The answer here is “no” with a small caveat. Payday cash advances are part of a subset of bad credit loans called “no credit check loans.” This subset includes cash advance loans, payday loans, and title loans. Since these no credit check lenders do not run any checks on your credit history during their application process, they also do not report your payment information to the credit bureaus.

Regular lenders like banks will always run a hard credit check when you apply for a personal loan. That hard check returns a full copy of your credit report and gets noted on the report itself. These checks will often lower your score slightly and can do so for up to two years. Many bad credit lenders run what’s called a “soft” check on your score, which returns less information and won’t affect your score at all. Many of these lenders, like OppLoans, also report your payment information, which can help your score if those payments are being made on-time.

No credit check lenders, on the other hand, do not run any kind of credit check and do not report payment information. They do, however, send unpaid accounts to collection agencies. And those agencies will report those accounts to the credit bureaus. (The exception is title lenders, who will repossess your car in order to repay the amount owed.) So while a payday cash advance loan will not end up on your credit report and won’t affect your score, an unpaid cash advance loan will indeed show up on your report and hurt your credit score.

To learn more about credit reports, check out these related posts and articles from OppLoans:

What other questions do you have about credit reports? We want to hear from you! You can email us or you can find us on Facebook and Twitter.

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN

How Bad Is It to Miss a Credit Card Payment?

How

A single missed payment can do lasting damage to your credit score.

Our latest episode of OppU Answers digs into a question that a lot of people have probably had at one point or another: How bad is it to miss a credit card or loan payment?

The short answer? Pretty bad. In fact, maybe 100-points-or-more bad.

A single late credit card or loan payment will impact people differently (largely based on their credit history), but the results will never be good. FICO, the company that provides the most widely used credit score, compared the effect of a late payment on two hypothetical consumers. In their test, Consumer A started off with a “good” score of 680, while Consumer B started off with a “very good” score of 780.

FICO found that after just one 30-day delinquency, Consumer A’s score dropped 60 to 80 points, slipping to the lower end of what’s considered a “fair” credit score. Consumer B’s score dropped even more, tumbling 90 to 110 points. This is because the higher a consumer’s credit score, the greater the effect a black mark will have on it.       

Consumer AConsumer B
Current FICO Score680780
Score After Missed Payment600-620670-690
Points Lost60-8090-110

Want to learn more and get tips on how to avoid missing a payment in the first place? Our latest episode of OppU Answers has you covered. 


Transcript

What Happens If I Miss a Credit Card or Loan Payment?

Hey OppU Answers! I’m a little low on cash this month. Exactly how bad would it be if I skipped my loan or credit card payment—just this once?

It seems like it shouldn’t be a big deal, right? After all, how much could one missed $70 payment really affect your life?

Turns out, it can get bad.

When you miss a credit card or loan payment, you typically have 30 days to pay up before your credit card company or loan servicer reports your late payment to the credit bureaus. But once they do, you’re gonna get dinged.

I’ve never missed a payment before. What’s one short-term slip-up gonna do?

According to FICO data, even someone with a 780 credit score and a spotless payment history could see a 90- to 110-point drop in their credit from just ONE 30-day delinquency.  

How Long Does It Take to Repair Damage From a Missed Payment?

But if it drops that quickly, it shouldn’t take long for me to build it back up, right?

Wrong. Once you get a black spot on your credit, it can take up to SEVEN YEARS to get it off. Even if you never make another late payment, anyone who pulls your credit report is going to be able to see that one mistake for basically the next decade.

How Can I Avoid Missing a Credit Card or Loan Payment?

The best way to keep your credit out of the fire is to make sure you pay all your bills on time.

If you’re short on cash this month, sit down and make up a budget, and cut out anything that’s not essential. Those $45 lobster lunches might be tasty, but you know what’s not tasty? Getting rejected for credit card and loan applications for the next seven years because you missed one payment.

If you’re struggling, try to at least make the minimum payment on your credit card, or call your loan company and see if you can work out a fix. Set up automatic payments on all your recurring expenses, so you won’t accidentally dock your score when your bill slips your mind.


If you have a money question burning a hole in your pocket, drop us a line on Twitter @OppUniversity. And be sure to check out our financial literacy lessons for more money tips!