Loan options which one can consider if they have bad credit

What is a credit score?
By convention, your mortgage lender will check your credit score, which will be calculated based on the information on your credit report. There are five factors affecting the score, each of which has a different proportion: repayment records account for 35%, arrears make use of credit lines for 30%, credit record durations account for 15%, and credit structures account for 10%. Credit accounts for 10%. Let us understand each of these factors one by one.

Repayment record
You should repay on time, as overdue repayments can have a significant impact on your credit score. For example: According to the US credit agency Equifax, a consumer has never missed a payment and holds a credit score of 780 (out of 850), but only has an overdue payment of 30 days, the credit score will be decreased by 90 to 110 points.

Debit-to-credit utilization ratio
Divide the amount of arrears accumulated on your credit card by the credit line of your total account. Credit experts recommend keeping this ratio at around 30%. If you overdraw your credit card every month, this can hurt your credit score.

Credit record duration
The longer the credit history, the higher the credit score. Credit expert Bill Hardekopf said that credit agencies look at the length of time you opened your earliest and latest accounts (for example: 2 years and 3 months) and the average length of time you opened an account across all accounts. Therefore, you should ensure that all accounts are enabled, even if the account balance is zero.

Credit mix
Holding different types of credit accounts such as credit cards, retail accounts, installment loans, car loans, and mortgages will help improve your credit score.

Add credit
Every time you apply for a new credit account, your credit will receive a “hard inquiry”, which will cause your credit score to decrease (usually 5 points). Therefore, we recommend not to open multiple credit accounts at the same time. Doing so will shorten the average opening time of your credit account and will damage your credit history.

Advice: Credit reports will not include a clear credit score. However, your credit card company is likely to give you a score for free, or you can contact a non-profit credit counselor to check your score.

What is the ideal credit score?
According to Fair Isaac Corporation, the founder of the widely used FICO credit score, the perfect credit score is 850, but only 0.5% of consumers can reach it. According to Chris Hauber, a mortgage originator at Hallmark Home Mortgage, a mortgage company in Denver, Colorado, as long as your credit score exceeds 740, you meet the standards of an ideal mortgage lender and can enjoy the best interest rate.

If your credit score is just over 700 points, you can still enjoy a more favorable interest rate. For regular loans, Hauber says, most lenders will require your credit score to be at least 620 points. Applicants must have a credit score of at least 660 to enjoy a relatively preferential interest rate, and they can apply for a loan without meeting additional requirements.

Can I apply for a loan without a credit history?
Ideally, you should open a credit card account at the age of 20 or build your credit by becoming an authorized user of your parents’ credit card in your teens. (Remember, the length of the credit history has a significant impact on how your credit score is calculated.) If you do not have any credit history, you can also obtain eligibility for a mortgage loan and start building a credit history through other methods. “Many lenders look at your monthly payment obligations, and those obligations don’t necessarily appear in your credit report,” Titsworth said. Experts point out that if you can repay car loans and pay rent on time, there will be a lot help. Often, these habits show whether you are a responsible credit user.

Bad credit is worse than no credit?
Some flaws in maintaining credit are inevitable. Maybe you occasionally forget the minimum repayment amount for a credit card bill, or you recently found an error in your credit report when discussing a loan option with a mortgage lender. In either case, you can take steps to remedy it. Titsworth states: “A bad credit record can be recovered if something happens.”