There are some purchases that require loans. Some people may be able to save up in order to make those larger purchases, but often the goals are just too large, or the need is immediate. However, poor credit choices in the past can come back to haunt you in the form of a low credit score. There are ways to get the loan you need, even if your credit score is less than desirable. Here are a few of the things to keep in mind.
Put More Down
Credit scores are a measure of risk. A lower credit score means that you are more likely to default on the loan, and the lender will suffer a financial loss. A higher score means that you are more likely to make on-time payments, and the lender will get their money back. If you pay more for your down payment, then you are able to reduce the risk to the creditor. This means that they will be more likely to give you the loan.
For instance, suppose you want to buy a car for $15,000. You decide to put $5,000 down, but the lender won’t give you the loan. So you increase the amount down to $8,000. If you still default on your loan, the lender can have the vehicle repossessed, and likely be able to sell it quickly to recoup the remaining $7,000 loss.
Pay More in Interest Charges
Higher credit means the lender is more likely to get their money back. So they want to encourage those with better credit to take out more loans. In order to draw them in, lenders offer lower interest rates for those with a high credit score. This is not good news for those suffering from poor credit.
Instead of waiting, you can get that loan now, and pay the higher interest rates. After a year or two, take a look at refinancing. You may be able to get the interest rate down to something that is more appealing after your score has gone up over the past two years of making on-time payments.
Build Your Poor Credit to Good Credit
If you have a low credit score (which is defined as having a score of less than 640) then you may be better off waiting on the big purchase while you increase your credit score. There are a few ways to get your score up that will not require a lot of work on your part.
Increase your credit card limit: Believe it or not, increasing the limit on your card can actually boost your score. Your credit card reports each month how much you owe on it (even if it’s paid off every month), and what your limit is. So if your limit is $5,000 and you charge $4,999 every month, you are using basically 100% of your limit (and posing a risk of going over or missing a payment). However, if you raise that limit to $10,000, and you still charge $4,999 every month, you are only using about 50% of your limit and you are seen as though you are in better standing.
Take out a credit card: If you don’t have a credit card yet, then you should get one. If the bank gives you trouble about it, ask for a secured card. This means you put $500 (or whatever the bank requires) into a CD or savings account. This is your collateral on the card which will have an equivalent credit limit. If you miss a payment, the bank has the right to dip into your savings to pay your bill. Just don’t let that happen; instead spend $10 or $20 each month and pay it off right away.
The bottom line is make timely payments on your credit, and over time your score will go up.
Getting a Loan with Poor Credit
If you need to make a big purchase this year, and you suffer from poor credit, then 2015 is the time to get that back on track. After you have an accountant in Billings, Montana prepare your taxes, and you have received your refund, then use that money as the down payment on the loan. That may be all it takes to secure it. If not, follow the above tips to help get your credit to a better status.
Practical Taxes is a full service accounting firm in Billings, Montana. If you need a simple tax preparation, then make an appointment to come on in. If you need payroll services, business consulting services, or other finance related services, give us a call and set up an appointment.