Bad credit? Your must-read guide to get a credit card or car loan, and rent or buy a home
Bad credit doesn't mean life is over — nor does it doom you to "living in a van down by the river."
You can still get a credit card, rent an apartment, buy a house, take out a car loan or get insurance. A low credit score just means you'll have to be careful, your options will be more limited — and you'll almost definitely have to pay extra.
If you absolutely must take the leap on a loan, here are hurdles you'll have to clear, costs you'll pay, and some advice about how to save in the meantime.
What is a good or bad credit score? Here's what the numbers actually mean.
First, know what you are up against.
"Good" or "bad" credit describes your ability to keep up with past obligations — and pay back borrowed money on time. Although there are several kinds of credit, your FICO credit score, used by most lenders, is a three-digit number usually ranging from 300 to 850. The lower the number, the worse the score.
There's no one number at which you cross over to the "bad credit" badlands. Rather, your "good" or "bad" standing — known as credit-worthiness — is determined by each particular lender. For example, a credit score of 580 may be accepted for a FHA home loan, but not for a credit card.
But, generally, categories of credit break along these lines:
Excellent Credit: 750+Good Credit: 700-749Fair Credit: 650-699Poor Credit: 600-649Bad Credit: below 600
Borrowing anything with a credit score of less than 650 will almost always cost you more — if you qualify at all.
If you have a low score, financial experts will advise you to think through how much more you'll pay if you take on additional debt.
Like, even if you fear interest rates will rise — and you'll miss out on a super-affordable home loan — waiting until your credit is better and securing a loan with more favorable terms may actually save you more in the end.
Find the best credit cards for people with bad credit.
No matter what credit card you choose, you'll pay relatively more in interest the worse your credit score: Credit card issuers base applicants' offers on their creditworthiness, among other characteristics.
You'll want to pay super close attention to any offer; even a few points difference in interest rate can help — or hurt you even more.
Let's say you have $5,000 in credit card debt at a relatively high APR of 20% and only make the minimum required payment each month to pay off that debt. In a year, you'll owe more than $3,000 extra interest, compared with a scenario in which you make the minimum payment each month but your interest rate is only 15%.
If your credit score is lower than 550, you're probably not going to be approved for a typical, unsecured, credit card. This is a hard knock, because making timely credit card payments is one way to rebuild your credit.
But even those with very bad credit can apply for a secured credit card.
Secured credit cards require a cash deposit, which the card issuer holds as collateral. You can get a credit line of $200, for example, after making a security deposit of $50, $100 or $200 — depending on your credit level.
As timely payments accrue, you will move up to higher credit lines with no additional deposits needed. This is an important part of improving your credit score: Your payment success will typically be reported on a regular basis to the three major credit bureaus — Equifax, Experian and TransUnion.
There is a price you'll pay as you rebuild your credit: The application, processing and annual fees on these secure cards can be significant.
Renting a home with bad credit? Get a cosigner or pay ahead on your house or apartment.
As if getting an apartment weren't already tough enough in this tight rental market, your credit comes into play, too.
Landlords will check your credit. A low score sends up the red flag that you're a risky tenant. They may charge you a higher rent, ask for a bigger deposit or flat out refuse to rent to you.
There are a few proactive things you can do to sway the landlord.
You can get a co-signer. Usually it's your parents, but it can be any adult or friend whose credit checks out. This resolves the situation quickly, but the agreement means that the co-signer is on the hook for whatever you can't cough up in rent. And if it is your parents, the agreement may come with strings attached and some relationship dynamics to manage.
Some landlords may be open to negotiation of your rent. But while most renters with fair credit are negotiating their rent down — you might find yourself negotiating to pay more just to get in the door. Putting down a larger deposit or offering to pay more may ease a landlord's concerns.
You can also minimize concern by being prepared for questions about your credit, according to Trulia, the real estate site. If you are able to demonstrate income and a steady commitment to paying your obligations some landlords may give you a shot.
A letter of recommendation from a previous landlord won't hurt either.
Buying a home with bad credit? Try for an FHA home loan or get a cosigner for a mortgage.
It will be hard to qualify for a home loan with a low credit score, and if you do, the interest rate will be higher.
Tim Lucas, editor of MyMortgageInsider.com, gives this example: Borrowers with a "good" FICO credit score of 740 today could qualify for a 30-year fixed-rate mortgage loan with an interest rate of 4 percent. While a borrower with a "bad" FICO score of 640 would be charged an interest rate of 4.38% for the same loan.
On a 30-year loan of $250,000, the borrower with lower credit would pay $55 more each month. That totals almost $20,000 if that borrower pays off the mortgage in full over 30 years.
Programs like FHA loans, which backs a portion of the loan, enable buyers with less-than-sterling credit — and a lower amount of cash on hand — to qualify for loans with as little as 3.5% down.
FHA loans are available to people with scores as low as 580, but there will be many fees and requirements attached.
Be careful when applying for a car loan with bad credit.
Auto lenders, like all lenders, charge higher interest rates to borrowers with low credit scores. The difference between an interest rate of 3.5% on, say, a $15,000 five-year car loan and one of 8% on the same loan can add up.
Loan experts recommend examining your need and advise against taking on more debt to buy a car when you already have bad credit unless you are in what could be characterized as an "emergency" situation.
Even then, it's probably best to hit up family or a friend for a ride for a while.
If you still need to purchase a car with your existing credit, Consumer Affairs, a consumer advocacy site, offers these tips:
Limit your search to two weeks: Lenders will pull your credit report to make a lending decision. This kind of request (a "hard" request) negatively impacts your score each time it is pulled. But credit reporting agencies afford a window of time — typically 14 days — so that all requests for a loan in that time frame will be counted as a single request.
And be sure to shop around, because each lender may have different criteria for the credit they are willing to extend you. Don't just take the financing offer given by the car dealer. Banks, credit unions and finance companies will all compete for your loan.
You may want to opt for a shorter loan since those typically come with lower interest rates.
If you still aren't able to get the financing you need, you'll need to explore getting a cosigner for your loan. Typically a parent or friend who agrees to make your payments in the event that you do not.
This is your last resort. Only take this approach if you are confident you will be able to make your payments in full and on time: Cosigning can go terribly wrong.
That said, if you are careful and do make your payments on time, having a cosigner on your loan can help boost your credit score.
If you have bad credit, expect higher insurance premiums.
Many people with bad credit are surprised to learn that insurance is yet another area where they are over a barrel at the mercy of their credit.
It may not seem to directly connect, but insurance companies contend, and their research shows, that people with higher credit scores tend to get into fewer accidents and cost insurance companies less than their lower-scoring counterparts.
Drivers with poor credit pay an average of $1,300 more a year in premiums, according to Consumer Reports. Your credit report will raise your rates a lot faster than a moving violation: One infraction for a driver in Kansas, for example, would raise the rate only $122.
This increase in premiums for those with poor credit only began in the past 20 years as insurance companies began testing their theories that those with bad credit have more claims, according to Consumer Reports. The insurance companies are under no obligation to inform you about why they are charging you.
That is unless you live in California, Hawaii, and Massachusetts. These states have prohibited insurers from using credit scores to set prices, limiting insurers to rely on drivers' records for rates.