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Bad Credit Definition

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What Is Bad Credit?

Bad credit refers to a person’s history of failing to pay bills on time, and the likelihood that they will fail to make timely payments in the future. It is often reflected in a low credit score. Companies can also have bad credit based on their payment history and current financial situation.

A person (or company) with bad credit will find it difficult to borrow money, especially at competitive interest rates, because they are considered riskier than other borrowers. This is true of all types of loans, including both secured and unsecured varieties, though there are options available for the latter.

Key Takeaways

  • A person is considered to have bad credit if they have a history of not paying their bills on time or owe too much money.
  • Bad credit is often reflected as a low credit score, typically under 580 on a scale of 300 to 850.
  • People with bad credit will find it harder to get a loan or obtain a credit card.

Unexpected Things That Lower Your Credit Score

Understanding Bad Credit

Most Americans who have ever borrowed money or signed up for a credit card will have a credit file at one or more of the three major credit bureaus, Equifax, Experian, and TransUnion. The information in those files, including how much money they owe and whether they pay their bills on time, is used to compute their credit score, a number that’s intended as a guide to their creditworthiness. The most common credit score in the United States is the FICO score, named for the Fair Isaac Corporation, which devised it.

A FICO score is made up of five major elements:

  1. 35%—payment history. This is given the greatest weight. It simply indicates whether the person whose FICO score it is paid their bills on time. Missing by just a few days can count, although the more delinquent the payment, the worse it is considered.
  2. 30%—total amount an individual owes. This includes mortgages, credit card balances, car loans, any bills in collections, court judgments, and other debts. What’s especially important here is the person’s credit utilization ratio, which compares how much money they have available to borrow (such as the total limits on their credit cards) to how much they owe at any given time. Having a high credit utilization ratio (say, above 20% or 30%) can be viewed as a danger signal and result in a lower credit score.
  3. 15%—length of a person’s credit history.
  4. 10%—mix of credit types. This can include mortgages, car loans, and credit cards.
  5. 10%—new credit. This includes what someone has recently taken on or applied for.

Examples of Bad Credit

FICO scores range from 300 to 850, and traditionally, borrowers with scores of 579 or lower are considered to have bad credit. According to Experian, about 62% of borrowers with scores at or below 579 are likely to become seriously delinquent on their loans in the future.

Scores between 580 and 669 are labeled as fair. These borrowers are substantially less likely to become seriously delinquent on loans, making them much less risky to lend to than those with bad credit scores. However, even borrowers within this range may face higher interest rates or have trouble securing loans, compared with borrowers who are closer to that top 850 mark.

How to Improve Bad Credit

If you have bad credit (or fair credit), there are steps you can take to get your credit score above 669—and keep it there. Here are some tips for accomplishing that, straight from FICO.

Set Up Automatic Online Payments

Do this for all of your credit cards and loans, or at least get on the email or text reminder lists provided by the lenders. This will help ensure that you pay at least the minimum on time every month.

Beware of advertised “quick fixes” to your credit score. FICO warns that there’s no such thing.

Pay Down Credit Card Debt

Make payments above the minimum due whenever possible. Set a realistic repayment goal and work toward it gradually. Having high total credit card debt damages your credit score and paying more than the minimum due can help raise it.

Check Interest Rate Disclosures

Credit card accounts provide these disclosures. Focus on paying off the highest-interest debt fastest. This will free up the most cash, which you can then begin to apply to other, lower-interest debts.

Keep Unused Credit Card Accounts Open

Don’t close your unused credit card accounts. And don’t open new accounts that you don’t need. Either move can damage your credit score.

If bad credit has made it difficult for you to get a regular credit card, consider applying for a secured credit card. It is similar to a bank debit card, in that it allows you to spend only the amount you have on deposit. Having a secured card and making timely payments on it can help you rebuild a bad credit rating and eventually qualify for a regular card. It also is a good way for young adults to begin to establish a credit history.

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Bad Credit

Loans for Bad Credit: Alternatives to High-Interest Loans

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In the face of unexpected events, most Americans don’t have enough cash to cover their needs. Statistics estimate that more than half of all Americans have less than $1,000 in a savings account.

It’s challenging to get through everyday life without expecting anything to go wrong. Any emergency — be it a car accident, a hospital visit, or even a broken refrigerator — will put Americans in trouble.

To add insult to injury, poor credit can make an emergency even more challenging. That’s where installment loans come in.

For consumers that have a bad credit score (below 630), installment loans can be the best option to get quick money. Installment loan funds are distributed all at once. Afterward, the repayment of the installment loan follows either a fixed monthly payment.

Online installment loans are ideal for emergencies as access to fast cash. Here’s everything you need to know before taking out an installment loan.

Online Installment Loan Basics

Installment loans are actually a broad category that includes many different kinds of loans, such as mortgage loans, car loans, and other personal loans. They tend to be long-term loans that require credit checks.

Payday loans are another type of installment loan. However, its structure is different. They must be repaid over a shorter period, have higher interest rates, but require no credit checks.

Installment Loans

As stated above:

  • Installment loans deliver quick cash in one lump sum

  • Installment loans require a credit check

  • Installment loans describe many different loan types

Furthermore, installment loan terms depend on the type of loan and can range from 3 years for car loans to 30 years for mortgage loans. In contrast, a personal installment loan lasts for approximately 12 months.

To get approval for any of the above loans, the individual will be subject to a credit check (more to know on that here: https://www.wisegeek.com/what-is-a-credit-check.htm ) and a fairly long application process.

Installment loans offer an APR of 36% or below, and user payments can be made online, over the phone, or by check.

Another advantage of installment loans is that they help borrowers improve their credit rating — as long as they pay on-time. It provides immediate access to cash, while at the same time, it’s a means to an end toward recovering a bad credit score.

How well individuals can do often depends on the terms of the installment loan that they receive. Keep reading to get more advice on how to choose an installment loan that is right for you.

Choosing an Online Lender

Like any other loan, picking a lender requires a fair amount of research and work. It’s not going to be a simple task, and there are several factors that individuals need to look out for when picking the right loans.

Below are the most important features that individuals need to keep in mind when choosing an online installment loan.

Compare Rates

All the different installment loan options out there are going to offer different percentage rates. These range from 6% to 36%, and you should sift through all possible options to get the most favorable rates.

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Ideally, individuals should opt for the lowest rates to ensure that the monthly payments are as low as possible.

Online lenders can offer potential borrowers their interest rates ahead of time. This usually requires a soft credit check, which does not impact a borrower’s credit score.

However, applicants need to be careful, as different vendors have different requirements. Understanding these requirements will help avoid any mishaps.

Understand All Fees

Every vendor has different fees, these fees might have different names like an “organization fee” or a “service fee,” but they generally range from 1% to 6%.

In contrast, other vendors might charge a prepayment fee for early repayment. Under no circumstances should a borrower agree to a loan deal before the lender discloses all fees.

It’s up to the individual to be as vigilant as possible because certain vendors will keep some fees to themselves, and may not disclose them until the last minute.

To avoid any excess costs in the future, make sure to go over the contract in its entirety.

Choosing Manageable Terms

Installment loans offer a lot of advantages for needy consumers:

But, one thing to remember is this: the longer the loan term, the higher the interest individuals will pay. Taking longer terms might give borrowers more time to pay, but it also means that borrowers will have to pay more interest.

In contrast, shorter terms are harder to manage, but it means paying a lower interest rate. When choosing the right installment loan, individuals should calculate the monthly payment based on the term length.

Many online vendors offer software that automatically calculates the amount. Everyone should employ a strategy to assess different term lengths to see what monthly payments are the most manageable.

Vendor Perks

Not all vendors are the same, and it’s already established that they offer different rates for different prices. However, while already offering different rates, vendors also offer different perks — specific features tailored to the individual.

If the individual is consolidating debt, certain lenders will send loan money to creditors on behalf of the loanee. Other vendors offer the ability to change due dates or provide hardship plans if the borrower encounters any financial difficulties.

It’s crucial to consider all these factors before taking out an installment loan. It’s best to have everything working to your advantage with an already poor credit history before taking out an installment loan.

Our Top Picks for Online Installment Loans

There are hundreds of online installment loan options out there, and looking through all of them can be a hassle. Furthermore, those new to the industry won’t be able to identify scams or loans meant to exploit.

Upgrade

Upgrade is one of the best installment loan vendors for those with a bad credit score. They accept a minimum score of 600 and will provide potential applicants with an offer in minutes. Their APR rates range from 7.99-35.97% depending on the amount, duration, and purpose of the loan. Users can easily apply for loans and get ideas on rates using the company’s website.

Simple Fast Loans

Simple Fast Loans is also among the best installment loan vendors for individuals that have a bad credit score. They offer loans ranging from $200-$3,000. These loans have terms up to 5 years.There’s no prepayment penalty, and applicants will also get next day funding. To get an idea of the rates, users can easily apply using their website.

LendingPoint

For users that have a credit score below 600, a great option to choose is LendingPoint. They accept a minimum credit score of 585 and offer loans for $2,000-$25,000. The APR rates for these loans are on the higher side ranging from 9.99-35.99%. Money becomes available to the applicant the next day, and there’s no prepayment penalty on the loan.

Avant

Another installment loan vendor for users that don’t have a good credit score is Avant. They require a minimum credit score of 580 and offer loans for $2,000-$35,000. The APR rate is between 9.95-35.99%, and they offer the ability to change payment dates. However, applicants will have to pay a loan origination fee, and there’s no option to include a co-signer on the loan.

Online Financing Options to Avoid

Online installment loans are a great option for individuals with bad credit scores, and, if used correctly, are a way to improve credit scores.

However, the same can’t be said for all online financing options, and certain ones are important to avoid.

Payday Loans

Payday loans function similarly to installment loans. In addition, they have recently been rebranded as short-term installment loans.

The loans are usually under $1,000 and are due on the next payday. With payday loans, an individual will have to either submit a post-dated check or provide access to the bank account.

It might sound relatively okay, but the issue with payday loans is that it’s nearly impossible to pay them back. Lenders will let individuals roll over the loans with more interest to pay the next day. Interest rates are typically 400% APR on these loans, and individuals get caught in the payday loan debt cycle.

No Credit Check Loans

These loans might seem like a good idea for those with bad credit scores, but they’re essentially just a debt cycle. The combination of high-interest rates, short terms, and lump sum repayment means that borrowers are stuck in a cycle of ever-increasing debt. It’s best to find loans that offer some sort of credit check and security to get the best terms.

Upfront fees

While certain loans might require a small percentage to process the application, some can be a complete red flag. There are plenty of up-front loan scams, and there are several signs that borrowers need to address. If a vendor asks for money upfront, then there’s a good chance it’s a scam.

Additionally, these issues tend to arise the most with vendors that don’t offer credit checks. Lastly, do enough research to recognize an offer that seems too good to be true.

Conclusion

Keeping all these things in mind, online installment loans are the best option for borrowers with a bad credit score. They are a useful resource and, if managed correctly, are a path to recovering a good credit score.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes



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Build Mastercard Credit Card Review

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When you have bad credit, it can be extremely hard to build it back up. To rebuild your credit, you need to open a new credit account, pay your bills on-time and keep it in good standing. But when your credit is bad, there are very few companies that are willing to approve you for a new credit card account. However, the Build Mastercard is specifically designed for people with bad credit. Let’s take a look at this card and see how it works.

How the Build Mastercard Works

This card is designed for people who have had serious credit problems, and it charges setup and maintenance fees to offset that risk. It is marketed as an affordable alternative to payday loans for customers who are trying to establish, strengthen or rebuild their credit history. It promises customers clear upfront pricing, no hidden fees, and tools that help them use and build credit wisely.

To open a new account, you will have to pay a one-time account setup fee of $53 and a membership fee of $72 annually. These set-up and maintenance fees will be charged to your account before you begin using your card, and will reduce the amount of credit that will be initially available. For example, if you receive a $500 line of credit, then your initial available credit will be $375, which is $500 minus the $72 membership fee and the $53 account setup fee.

Top Features:

Reports to major credit bureaus; initial credit limit of $400; fast application process with results in seconds

The late payment and returned payment fees are each $35, but thankfully, there are no over-the-limit fees or foreign transaction fees imposed on charges processed outside of the United States.

Another important aspect of the Build Mastercard is that it has no grace period. With most credit cards, you can avoid interest charges by paying your monthly statement balance in full. The period between the statement closing date and the payment due date is known as the card’s grace period. Since the Build Mastercard has no grace period, it will begin charging interest on purchases and cash advances on the date of the transaction. The standard interest rate for purchases and cash advances is 29.9% APR, which is a variable interest rate that can rise or fall with the Prime Rate.

As a Mastercard, this card is accepted worldwide at millions of merchants in nearly every country. Mastercard also offers a Zero Liability Protection policy. This means that even though the Fair Credit Billing Act allows card issuers to hold customers liable for a maximum of $50 in the event of fraud, you’ll never be responsible for any amount in the event of an unauthorized transaction. To utilize this policy, just take reasonable care to protect your card from loss or theft and promptly report any loss, theft or unauthorized charges to your card issuer.

Build Mastercard Advantages

This card is designed for applicants with bad credit. If you’ve had credit problems, then you will be far more likely to be approved for this card than you would for a card that wasn’t meant for those with bad credit. Unlike secured cards, the Build Mastercard doesn’t require that you pay a deposit and it will start off most accounts with a $500 line of credit (which will be reduced to $375 until you’ve paid the $72 membership fee and the $53 account setup fee).

The Build Mastercard is also a full fledged credit card, which will make it easier to rent a car or check into a hotel room. In contrast, those who have debit or prepaid cards can have difficulties when traveling and may have to submit a cash deposit to rent a car or check into a hotel.

Top Features:

Reports to major credit bureaus; initial credit limit of $400; fast application process with results in seconds

And although this card has numerous fees to open an account, it has no foreign transaction fees. Most credit cards, and even some premium reward cards, still charge a 3% foreign transaction fee on all charges processed outside of the United States. So whether you are making a quick trip across the border, or taking a vacation overseas, you can use this card anywhere without being assessed an additional fee for each transaction.

Finally, the Zero Liability policy is one of the best protections offered by a credit card. This allows you to use your card with the confidence that you won’t have to pay any of the cost of fraudulent transactions.

Build Mastercard Disadvantages

The $72 membership fee and the $53 account setup fee are expensive, and some applicants may want to consider a secured card instead. There are plenty of good secured cards listed here. While you may have to pay an even higher deposit to open a secured card account, that money is refundable when you close your account in good standing. The 29.9% APR interest rate is high, but not out of line for a card marketed to those with bad credit. Finally, the lack of a grace period means you will always have to pay some interest on your charges, even when you pay your statement balance in full.

Bottom Line

The Build Mastercard is specially designed for people with bad credit, and it has its own distinct advantages and drawbacks. By carefully understanding how this card works, you can decide if it is right for your needs.

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Are There Mileage Limits on Rent to Own Cars?

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Rent to own cars, also called lease to own vehicles, don’t come with mileage restrictions. They can be a good option for bad credit borrowers who need a car fast. We cover how these agreements work, and how they’re different from other vehicle buying options.

Rent to Own Cars and Mileage Limits

Are There Mileage Limits on Rent to Own Cars?Traditional leased cars come with mileage limits, but rent to own vehicles don’t come with this restriction. Traditional leasing companies place mileage limits on their cars to preserve their value, typically so that they can be sold at a later date as pre-owned vehicles.

Many people think that leasing and rent to own cars are similar, but the truth is that they’re very different. Leasing involves making payments on a vehicle for around two to three years, and then returning it at the end of the lease. With rent to own cars, the main goal once you make all the payments is ownership.

Another large difference between leasing and rent to own vehicles is that leased cars are almost always brand-new vehicles. Rent to own cars are always used.

How Rent to Own Vehicles Work

To get into a rent to own vehicle, you need to find a dealership that offers in-house financing, also called buy here pay here (BHPH) used car lots. These dealers are also lenders, so they don’t rely on third-party lenders for financing. This also means that you usually get to skip the credit check.

Since there typically isn’t a credit pull, borrowers with poor credit may have a better chance of qualifying for a rent to own vehicle than a traditional auto loan or lease. The biggest factor that determines your eligibility for these agreements is your income. Some rent to own cars don’t require a down payment, but the payments are likely to be higher than an auto loan in the long run.

You also don’t have to worry about interest charges because rent to own agreements aren’t loans. You’re not borrowing an amount from a lender to pay for a vehicle – you’re making payments on the car to the dealership until you’ve paid what you owe.

Bad Credit Auto Loans vs. Rent to Own Cars

A big downside to rent to own vehicles is that there sometimes isn’t a chance for credit repair. If the dealer didn’t check your credit reports to determine your eligibility for the car, then they may not report your on-time payments. Anything that isn’t reported on your credit reports doesn’t impact your credit score, so it doesn’t help improve it.

Bad credit auto loans from subprime lenders, however, are always reported. These lenders do check your credit reports, but they consider more than that. Sometimes, credit reports can’t tell the whole story, so subprime lenders use other facets of your situation to determine your ability to repay a car loan. They examine your income and residence history, require a down payment, ask for personal references, and more.

Subprime auto loans are crafted for bad credit borrowers who want to get on the road to credit repair. While rent to own vehicles are a good short-term solution, it doesn’t usually solve the bigger issue: bad credit.

Repair the Root of the Problem With a Car Loan

When you’re struggling with poor credit, it’s tempting to go for a quick solution like a rent to own car. But if you want to repair your bad credit, consider subprime financing. These lenders are signed up with special finance dealerships, and we can help you find one in your local area.

Here at Auto Credit Express, we have a network of special finance dealers all over the country. Get matched to one near you by filling out our auto loan request form. There’s never an obligation, and we’ll get right to work!

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