Bad Credit loans is the term that refers to a range of loans for people who have a poor credit history (That means the history of paying their bills on time or fail to make on time in the future). These people often struggle to get normal or ordinary loans at high street banks. Often it is reflected to have a low credit score. Bad credit loans are not only about a particular person but also companies can have bad credit based on their credit history or the present financial condition. Basically, these loans have a higher rate of interest or you may have to secure something to take this loan as security. It could be your car, house etc.
Like this, a person is considered to have a bad credit score if he owes too much money from a bank or someone else. Generally, the score of under 580 is considered as a bad credit score on the scale of 300-850. Such people face difficulties getting a loan and or a credit card.
Whenever you are talking about credit cards or credit score you will always hear the term called as FICO Score. FICO is a type of credit score that is created by Fair Isaac Corporation. It is an analytics software company for providing products and services to business and consumers. In U.S. almost all the card issuers and lenders use the traditional model of FICO to decide at what rate of interest and how much credit to give to a consumer. Check out dispute your credit report online
The FICO Score ranges from 300 to 850. If you are having a score above 650 then it is considered as good credit history. And a score below 620 finds it difficult to get the loan.
To check the creditworthiness, the borrower’s FICO Score is being checked along with the other factors such as income, type of credit requested, job type etc.
To calculate the credit score, FICO weighs each category differently for each individual. The calculations such a way, payment history is 35% of the score, 30% total amount an individual owes, 15% is length of a person’s credit history, 10% is mix of credit type and 10% is new credit.
FICO Score is calculated on the basis of 5 credit score factors, they are –
Payment History is the most important factor while calculating the FICO Score, it comprises 30% of the total credit score. According to FICO, to forecast your future long-term behavior, past long-term behavior is used. FICO checks both the loans that are revolving loans and installment loans(student loans or mortgage loans).
The principal scientist at FICO, Tommy Lee said that FICO scores consider the recency, frequency, and severity of a report missed payments.
The borrowers can improve their credit scores by making timely payments.
Utilization of Credit
30% of your total credit score is considered for the utilization of credit. Mortgages, car loans, credit card balance, court judgments, and other debts are included in this. It is measured individually by card or by multiple cards. Credit utilization ratio is the comparison of available money to borrow to how much the person owes at the given time.
So, by the above two factors, you see they carry maximum weightage to improve your credit card scores. If you are paying your bills on time then your credit score will be considered good or else you will come under the bad credit score category and in bad credit loans.
Length of Credit History
As a rule of thumb, the longer the individual has credit, the better is his score. Length of credit history means the length of time the account has been opened and the length of time account’s most recent action is done. This covers 15% of the weightage.
Therefore to improve the credit scores, individuals without a credit history, start using credit and who have credit should maintain a long-standing account.
10% of your total credit score is considered for new credit. Often people misunderstand this with – opening multiple credit lines will improve your score. This is not the case here.
Again Tommy Lee said that they encourage customers to open and apply for new credit accounts but only when it is required. In fact, opening multiple credit lines can be considered as a negative side or in other words it can be misinterpreted as you are in financial trouble and that is why you need access to lots of credit. You might be thinking then what is the meaning of adding this point, so here is the answer – opening a new account will decrease your average account age that can improve your FICO score only when you don’t have a lot of other credit information.
The last 10% of your score is built by a credit mix. Again this includes mortgage, car loans and credit cards. The Credit mix basically indicates a variety of accounts. If you have a good mix of retail accounts or installment loans such as mortgages or vehicle loans, you can obtain a high credit score. This means if you have a good mix of installment loans and revolving credits then it will represent less risk.
Types of Bad Credit Loans:
- Personal Loans – The most common type of loan that involves borrowing for 1 to 7 years. In this type of loans rate of interest is normally fixed, this means you know what will you repay.
- Guarantor Loans – This is almost the same as the personal loans, what makes it different is that it involves a third party. This means an agreement with a third party like a family member, friend, or a guarantor who will ensure that the loan is repaid in the given time. And if the person failed to repay the loan then the guarantor takes the responsibility and repays the loan. If you are having a bad credit history then this Guarantor loan is made for you.
- Installment Loans – Personal or guarantor loans that are to be paid in a certain time interval or say in installments.