Time is a one-way street. We can’t go back and redo the past behaviors and events that are causing us credit problems today. That doesn’t mean that the problem of getting personal loans with bad credit will haunt us for the rest of our lives. Personal loans and credit cards are basic necessities of modern life. Making up for the past events that have made those necessities unavailable takes time and discipline, but there is a clear path we can all follow. The steps of that path include:
- Learning the specifics of how credit rating agencies and financial institutions evaluate “creditworthiness“
- Identifying the past and present events or circumstances that credit rating agencies and financial institutions see as “red flags” that hurt your creditworthiness.
- Learning the practical steps that are available to eliminate those “red flags”.
Repairing a bad credit history and achieving a credit score that makes personal loans and credit cards available at decent rates is a long-term process. Trying to do too much too soon raises the risk of creating a new “red flag”, making the process longer than it would otherwise be.
How Do Credit Rating Companies And Financial Institutions Determine Creditworthiness?
A loan officer’s job is to determine the risk that an applicant will default on a loan. The most reliable tool available to the loan officer is the applicant’s personal financial history. That makes getting personal loans with bad credit history difficult no matter how badly the loan is needed. Loan officers typically turn first to a credit rating agency such as FICO. FICO and similar agencies take the information available to them about your credit history and converted that information into a single score. Not all elements of your credit history are weighted equally. Starting with the most important, the elements of your credit history considered generally include:
- The applicant’s history of making payments on time. The number of late or missing payments on credit cards, automobile loans, mortgages, or other loans, is the biggest single factor in determining your credit worthiness.
- The second most important factor, often called Credit Utilization, is based on the percentage of the credit available to you that is already used. Simply put, if you’ve applied for a credit card in the past, and have used most or all the credit limit the card came with, that will drive down your credit score. The effect is particularly damaging if the card has stayed “maxed out” for an extended period of time.
- Also important is the presence or absence of extended periods of time when all payments were made in full and on a regular basis.
- It also helps if there is evidence that the individual has successfully used a number of different types of credit in addition to credit cards. These may include auto loans, installment loans on major appliances, prior consumer loans, and mortgages.
- Making large numbers of credit applications (unless they are tightly bunched, and clearly related to seeking the best terms for an auto loan or other major purchase) is also interpreted as a red flag.
Finding the Red Flags in Your Personal Credit History
If getting personal loans with bad credit is a recurring problem for you, getting a free copy of your credit report is an important step. It may be useful to review your credit report with a credit counselor from a reputable nonprofit debt counseling agency. By carefully reviewing your credit report, you may:
- Find inaccurate information that is prejudicial to your score.
- Find that potentially helpful information is not included in your report.
- Identify the “red flags” that are most damaging to your credit score, and develop an affordable strategy for counteracting the credit blemishes that matter most.
A qualified debt counselor can guide you through the process of correcting errors and omissions in your credit history, and can help you develop a livable budget that includes funds for improving your credit score as rapidly as possible by addressing your credit history blemishes in the right order.
Practical Steps to Improve Your Credit Score
The tools and techniques used to establish a better looking credit history and achieve a higher credit score are simple and logical, but they do require patience and discipline. If you are truly ready to end your problem getting personal loans with bad credit, here are some guidelines to follow:
- If you are behind with payments on any loan, get caught up as a first priority
- Then go after “maxed out” credit cards. Get the balances low relative to the credit limits, then keep the cards active and current.
- Establish a system that forces you to pay all bills on time every month. Set aside one or two regular “bill paying days” per month, and stick to that schedule.
- If possible, avoid opening new lines of credit so you can “move debt around”. Credit rating agencies will not be fooled. If you must apply for additional credit, make several applications at the same time, and choose the best offer.
- Remember the importance of demonstrating long periods of making payments on time, and keeping credit card balances low relative to credit limits. Establish a “rainy day fund” to keep payments flowing in the event of an unanticipated emergency.
- Over the long run, gathering assets that can be used as loan collateral is an important additional way to end your problem getting personal loans with bad credit history.