Many people with bad credit are in a doubly difficult position when it comes to accessing a loan because they are in the dark as to what lenders are looking for and how to make the changes needed to become more creditworthy. Just knowing that you have a so-called bad credit score is not enough, since there are many factors that go into the creation of that score. There are also several other aspects of your life and your credit that potential lenders will review. This article will give you some insight as to what lenders look for when they are assessing borrowers with bad credit.
What a Credit Score Really Means
To start, the details for almost all loans that you look for will be determined based on your credit score. This is a number that can range anywhere between 300 and 850. The higher your score, the more creditworthy you are, since the score is said to predict the chances that you will repay a loan. A bad credit score is between 300-499.
There are several factors that go into the calculation of your credit score. They include your payment history on all accounts. That is, they want to know if you make your payments on time and if you pay more than the minimums required each month (especially on credit cards). Lenders will also look at your credit utilization ratio, which is the percentage of credit you have and how much you are currently using. They will want to know your length of credit history, longer you have been using credit, the better. And finally they will look at the types of credit that you use and any recent inquiries into your credit.
One other factor that goes into how your credit score is assessed is the legal end of things. Lenders will look into court judgments against you in the form of bankruptcies and liens on your income due to old debts. It is one thing in incur late fees, it is quite another to not make payments at all such that a company needs to sue you for the money. These sorts of histories are the biggest factors in a bad credit score.
Factors Other Than Credit
While your credit score is the number one element that will be used to assess your creditworthiness, a close second is your income and job stability. You can have a sterling credit rating, but if you have just been laid off or come off a string of unemployment creditors will be less likely to lend to you.
A general rule of thumb in terms of employment is the ability to show a solid income over a period of at least three months. You can do this with either paystubs or W2 forms. In addition, your income needs to be high enough to support the repayment of this new loan in addition to all other credit obligations you currently have. Therefore, you should make sure to write down a detailed budget prior to talking to a lender. This way you know how much you can afford and how much leeway you have.
What It All Means
Bottom line, your creditworthiness will be used to make a few important decisions. First, whether or not a lender will work with you in the first place. Many times this point is determined based on income. Even those with poor or bad credit scores can find loans if they have good employment. Next, your credit score will help to set the rate of interest. The lower your score, the higher the interest rate will be. Finally, the combination of both income and credit will determine how much money the lender will offer you.