When a person has poor credit, it may seem impossible to obtain financing for needed purchases. However, the availability of financing depends partly on how bad a person's credit is and partly on what type of purchase is involved. If you have poor credit, you may still be able to get financing, or at least take steps to open up some options within a year or two.
Identification
A person's credit rating is based on the information recorded in their credit history. All three of the major credit bureaus (Experian, Equifax, and TransUnion) rely mainly on the FICO credit scoring system to summarize the information in the credit history. A person is viewed as having subprime (poor) credit if the FICO score is under 620 out of a possible 850. 680-700 or more is considered good credit. Some lenders won't extend credit to subprime borrowers at all. Those who do are likely to charge high interest rates unless the loan is made or guaranteed by a government agency.
Mortgages
The Federal Housing Authority (FHA) guarantees home loans for millions of people, many of whom have poor credit. The FHA accepts a FICO score of 580 provided some other conditions are met. With FHA approval, a person can secure mortgage financing at competitive interest rates even with poor credit. The FHA looks at recent credit use, particularly whether an individual has paid rent (or another mortgage payment) on time for the past year. Applicants need to show a steady work history and income that is stable or rising. Generally, any bankruptcy or foreclosure has to be at least two years old, with responsible use of credit since the event. For veterans, the Department of Veterans Affairs also has a loan guarantee program. VA home loan criteria are similar to those for the FHA.
Student Loans
Poor credit need not bar a person from pursuing an education. The Office of Federal Student Aid helps millions of people finance college or vocational training with subsidized and unsubsidized loans. Unlike private student loan lenders, Federal Student Aid does not check an applicant's credit history. If a prospective borrower meets income and financial need requirements, he or she can finance an education this way. Persons who are in default of a prior student loan or who must repay a grant are not eligible unless they have made satisfactory arrangements to repay the debt. Persons with a drug abuse conviction while previously receiving federal student aid are also ineligible. You can apply for federal student loans online at fafsa.ed.gov.
Consumer Finance
With poor credit, financing a large purchase like a car or even getting a credit card can be a daunting task. However, there are lenders who specialize in extending credit to subprime borrowers. Some banks and credit card companies offer secured credit cards. A borrower must deposit money as collateral and will have to pay high interest rates and annual fees. This is an excellent way to start rebuilding credit. Use the card but pay off the balance each month to keep those interest charges down. For those who need to finance a car, there are also lenders who can help. Again, however, this is an expensive route to take because the interest rates will be high.
Considerations
If a person has a relative or friend who is willing to co-sign for a car loan or other financing, this can be an ideal way to start rebuilding credit. If you find yourself in this situation, remember the co-signer is putting his/her own credit rating at risk on your behalf. To rebuild your credit and prevent more damaging credit reports being added to your credit history, priority number one is to pay all bills on time. The more consistent you are about timely payments and the longer you keep your bills current, the more our credit will improve. Avoid borrowing more than you have to and don't open or close accounts frequently, as these are things that contribute to poor credit ratings.
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