Getting a bad credit score marks you as a risk and can be a significant issue, particularly when you are hoping to take out a loan later on. Being a risk will goad the lenders to lessen it by charging you higher interest rates or rejecting your application.
Bad credit loans are intended for individuals with poor credit files and credit histories. They are also offered to first-time buyers and self-employed, who loan specialists view as higher-risk borrowers.
Lenders specialising with bad credit loans usually have a reputation because of high-interest rates associated with it. You can apply for a loan at a bank, however, they have stricter criteria which may result in the application to be rejected. Rejected loan applications can do more harm to your credit rating, which can influence your future loan applications. Missing or defaulting on your loan reimbursements can also harm your credit score.
Here are 5 pointers to remember when taking out a bad credit loan to refrain from hurting your credit score:
- Estimate a loan amount you can acquire by using a loan calculator.
- Make sure you can afford the repayments by factoring in the loan amount to your weekly budget.
- If you have doubts about your repayment capabilities, think twice if a bad credit loan is the best option.
- The lender of your choice should be chosen wisely.
- Set aside and save some funds to tide you through a crisis, so you can get around defaulting on your loan.
Other loans for borrowers with bad credit:
- Secured loans — Using your home or car to secure your loan can enable you to meet all requirements.
- Guarantor — Some lenders approve borrowers with bad credit or access to funds that are guaranteed by family or friends. Whether you can’t pay back the loan, it’s the guarantor’s responsibility to take care of the cost.
- Payday loans — For smaller loan amounts, some lenders are less worried about your credit history and your finances. Keep in mind that payday loans frequently have substantial fees if your payments are late.
Bad credit rating
Your credit score is assessed through various factors. Outstanding debts or late repayments, previous loan applications, and lenders the type of loans you have applied for are factors to be considered when applying for bad credit loans.
Practices that harm a credit rating are:
- Making multiple credit applications at once
- Missing payments
- Being careless about your bills
- Making late payments
- Exceeding card limits
- Skipping payments
To avoid being black-marked, it is advisable to be responsible for your payments. If you have no credit history (have not applied for a loan previously), it can be considered a bad credit and can cause for a denied application.
Credit Bureau
There are Australians agencies that keep track of borrowers’ history and give credit scores that lenders use to evaluate loan applications. These credit bureaus are:
Get in touch with at least one of the agencies for a copy of your credit history (free copy per year + incurring fees). A free copy can also be requested after denied application in the past 90 days.
Enhancing a bad credit rating:
- Pay bills on time
- Keep a consistent job and home address
- Grow your savings
- Clear and avoid debts
- Fix errors on your credit file (contact the credit bureau)
- Minimise credit applications
Direct debit for bills payment
It’s useful for your credit score when you pay your lease, telephone, web, water, power, and other bills on time. Direct debit can make the procedure less demanding. By setting up an auto-payment system, you don’t need to make payments manually or via phone call.
*Caution: Ensure there are funds in your account to cover the direct debit, in light of the fact that a missed payment will harm your credit score.
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Comprehensive Credit Reporting
The Australian credit system started to report credit history more comprehensively since March 2014. Before, a positive repayment history won’t wash out any extraneous bad credit history. These were all recorded in your credit file.
Nowadays, comprehensive credit reporting casts a more positive perspective of your past record. This has a good effect on individuals with not so perfect score who may have defaulted on a loan, yet made repayments periodically. It is the same with new borrowers without a credit history.
Disclaimer: Please be aware that Cigno Loans’ articles do not replace advice from an accountant or financial advisor. All information provided is intended to be used as a guide only, as it does not take into account your personal financial situation or needs. If you require assistance, it is recommended that you consult a licensed financial or tax advisor.