If you need a loan — whether it’s personal, auto, home, etc. — you may notice that a lot of lenders require a minimum credit score of around 600 or 620. This leaves individuals with lower or no credit scores in a tough situation. What do you do if your credit score is lower? And by all accounts, “bad”?
Just because you have a bad credit score (or no credit score) doesn’t mean you don’t have any options when it comes to loans. Let’s explore the best loan choices for credit scores in the 500s.
Table of Contents:
- Loans for 500 Credit Scores
- How to Get Loans with a 500 Credit Score
- How to Improve Your Poor Credit Score
- Frequently Asked Questions
- Final Thoughts
Loans for 500 Credit Scores
It can be harder to get a loan if you have a poor credit score in the 500 range, but the good news is that there are still plenty of lenders who are willing to work with you.
If you’re applying for an unsecured personal loan with bad credit, the loan will be like any other unsecured personal loan. However, you’ll be subject to additional fees and higher APRs because of your poor credit score. Additionally, you may also need to meet certain criteria. Lenders often like to see the following.
You have resolved any outstanding issues with your credit history
If you’ve fixed issues with your credit history like delinquent debt, tax liens, or bankruptcies before applying for a loan, lenders are more willing to overlook poor credit history. This helps to ensure that your past issues won’t keep you from repaying your new loan.
You have a high enough income
Lenders want to make sure you have an income high enough to repay the loan you’re about to take on. They determine this by looking at your debt-to-income ratio. However, you can be extra prepared before applying by reviewing your budget to ensure you can make the monthly payment that will be required.
Your financial situation will be improved by the loan
You may be more likely to be approved if the loan will improve your financial situation or credit. For instance, if getting the loan allows you to consolidate existing debt with a lower interest rate, which would allow you to pay off your balance more quickly, then a lender may be more likely to approve it.
How to Get Loans with a 500 Credit Score
In many cases, waiting until your credit score improves is a better option than applying for a loan with a poor credit score. Yet, this isn’t always an option. If you’re in an urgent situation and need to apply for a loan immediately, here are a couple of strategies you can explore to obtain the best loan.
Use a co-borrower
If you’re struggling to get a loan on your own, consider applying with a co-borrower that has a better credit score and stable monthly income. Lenders feel more confident knowing that they are approving an application where at least one party has a proven track record. Using a co-borrower is an option for car loans, home loans, and personal loans if a spouse or other blood relative is willing to sign with you.
Investigate in-house financing
If you’re struggling to find an external lender that will finance your loan because of a low credit score, explore in-house lending. In-house lending is when a retailer extends a customer a loan for the purchase of its goods or services. So, for example, if you’re trying and failing to get an auto loan because of your 500 credit score, you can ask the dealership if they have in-house financing. While this may be a quick fix to your issue, be mindful that dealers with in-house financing often charge higher interest rates.
How to Improve Your Poor Credit Score
Are you considering delaying your loan application until you can improve your credit score? It’s the smart move if you can wait, but most people don’t know where to start. Once your credit score has taken a few hits, it can feel hopeless. Here are some steps you should consider to help boost your score.
Pay your bills on time
One of the easiest ways to increase your credit score is to pay your bills on time. This includes credit card bills, phone bills, utility bills, etc. For credit cards, you’re only required to make the minimum payment each month, but if possible, pay it off in full. This will help keep your credit utilization low.
Set up auto-pay
When you have several monthly payments due each month, you may find it difficult to keep track of when to make these payments. If this is contributing to late payments, consider setting up auto-pay services. Automating the process will ensure that you don’t miss payments simply because you forget about them (not because you don’t have the cash to make them!).
Think about opening and closing credit cards
Credits cards are a tool for you to use. When used wisely, they can impact your credit score positively. However, when you open cards frequently and close cards randomly, they can negatively affect your score.
To understand why this is, you must first understand your credit utilization ratio. This ratio is generally expressed as a percentage, and it represents the amount of revolving credit that you’re using divided by the total credit available to you. Lenders look at your credit utilization ratio to determine how you’re managing your debt (and if you’re doing a good job).
When you open a new card, you increase the amount of total credit available to you. This can help your credit score. However, opening a card also signals to a lender that you have more of a need for credit. So, if you’re going to max out that card (100% utilization), this can be more of a negative than a positive.
Likewise, when it’s time to close a card, you should reflect on how that may impact your credit score. Closing a card will not only reduce the total credit available to you, but it can also shorten your length of credit history if it’s an old card. Both factors can cause your credit score to drop if you do it carelessly.
Don’t consider your “credit limit” to be your spending allowance. Maxing out your cards every time will hurt your credit score and make it harder to get loans when you need them. Pay attention to your credit utilization ratio each month and stay around 15 to 30% of your credit card limit in every billing cycle.
Don’t open new cards
Refrain from opening new cards on a whim! New credit applications account for around 10% of your credit score. So, make sure you spread out your loan applications and credit cards every couple of years if possible.
Create a monthly budget
Budgeting can be a helpful tool to help you track your bills and repayment dates. When you start to track the flow of incoming and outgoing funds, it’ll allow you to understand where your money is going and how you can better allocate your financial resources to your needs versus wants.
Frequently Asked Questions
What is considered a bad credit score?
A credit score is a three-digit number that lenders use to predict your credit behavior. In other words, it indicates how likely you are to pay back a loan on time. Here are the credit score ranges that FICO uses:
- Excellent: 800 to 850
- Very Good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
- No Credit: Insufficient data to score
What factors influence a credit score?
Five categories will influence your credit score. Understanding how your score is calculated is essential because it’ll help you improve your score and maintain it.
- Payment History (35%) – The most important factor in a credit score is your payment history. Think about it — anytime someone lends anyone money (their friend, family member, a stranger) the first thing they want to know is when they’ll get their money back. Your credit score is an indication of whether you’ve paid past debts on time or at all.
- Credit Utilization (30%) – As noted above, credit utilization is a factor that lenders look at. If you’re using a lot of the credit available to you, then it can indicate to banks that you’re overextended and less likely to pay back additional loans. They don’t want to give loans to anyone at risk of default, so you’ll want to keep an eye on the amount of money you owe across all your accounts compared to the total credit you have available (credit utilization ratio).
- Length of Credit History (15%) – A long credit history can be favorable to your credit score. The calculation of your score will consider how long your accounts have been established, the age of your oldest account, the age of your newest account, the average age of all your accounts, how long your accounts have been established, and how long it’s been since you’ve used certain accounts.
- Credit Mix (10%) – When calculating your score, your credit mix is considered. It can be helpful to have a diversified portfolio — everything from credit cards to retail accounts to installment loans to finance company accounts to mortgage loans. You don’t need to have all of these but having a good mix (that you don’t overutilize) can help boost your credit score.
- New Credit (10%) – Opening several credit accounts in a short period is a red flag for lenders. It indicates that people are a greater risk when it comes to their ability to pay back the money they’re borrowing, especially if they don’t have a long credit history.
How do you compare lenders for a loan with bad credit?
If you’re shopping for a loan with poor credit, it can feel like you don’t have any options. How can you be picky if you’re struggling to find anyone who will accept your application? Still, you’d be surprised how many lenders are willing to work with individuals with bad credit. While they put themselves at higher risk, they can also make a lot of money off interest or other unfavorable terms. Do yourself a favor and compare lenders with the following checklist.
- APR Range – APR stands for annual percentage rate, and it reflects the yearly cost of the loan. Evaluate the APR (which includes the interest rate and fees) when comparing personal loan lenders.
- Loan Amounts – Find a lender that offers the right size of loan for your needs.
- Repayment Term Length – Select a lender that offers a repayment term within your budget as this will affect the size of your loan payment. The shortest repayment term is the most favorable, but it can also result in larger monthly payments, so this may not be possible depending on your financial situation.
- Ease of Application – Look for lenders that offer short online applications that don’t hurt your credit to apply.
- Funding Speed – Seek out a lender with next-day (or same-day) funding if you need to get money fast.
- Lender’s Reputation – Choose a lender with a good reputation and read customer reviews before moving forward.
What interest rate can I get if I have bad credit?
It will ultimately depend on the lender you use. Interest rates for personal loans range between 4.99% to 36%. If you have a credit score in the 500s, then you’ll likely be offered an interest rate on the higher end of that scale.
If you have bad credit and need to apply for a loan, don’t stress! If you have time before you apply, focus all your energy on improving your credit score as much as possible using the tips above. If you need to apply immediately, remember that you still have lender options. After you’ve applied, you can compare the terms of the loan based on the aforementioned criteria to ensure you’re putting yourself in the best financial situation.