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If you have made some mistakes in the past as far as your credit is concerned, brace yourself for
the facts about bad credit loans. You should first try to assess just how bad your credit is before
you hit the panic button though. Very often, bad credit items that appear on your credit report can
be challenged and sometimes removed. In addition, mistakes on your credit report can have an
adverse effect on your credit score, shunting you into the category of a high credit risk. Items that
are good news for you but do not show up on your credit report (or on one or the other of the credit
reporting bureaus' file on your credit history), can cost you some valuable points. Last, but not
least, taking bad advice from well-intentioned relatives or friends can lower your credit score,
making you a candidate for bad credit loans.
Bad news first
Let's look at these possibilities for improving your credit rating one at a time. But first, let's get the
hard core issues out of the way. If you have had bad credit issues in the past and know you have
made some wrong choices that may have landed you in bankruptcy or wage garnishment, it will be
almost impossible to fix your situation in the short term. Medical emergencies have unavoidable
consequences as well but none of these means you will not be able to find a lender of last resort.
If you are reading this you are probably at the point where you have decided to turn around your
spiraling credit history, but know for sure that this will take time and will cost you money. Bad
credit lenders will equate you with high risk and assign a high interest rate to whatever type of loan
you are seeking in order to offset some of the risk that you may not pay back their loan on time.
Bad credit car loan
Let's say you are in the market for a car. You will be required to make a hefty down payment on a
bad credit car loan. I have heard of down payment requirements as high as $3,000 but that is not
the only problem you face. Your interest rate on a bad credit car loan may range from 19% on the
low end to as high as 29% on the top end. A high-mileage used car could end up costing you
$400.00 or more per month in monthly payments. To minimize the damage from these high rates, I
would suggest you start by calling several lenders. They usually both sell and finance the product
on the spot. If you can find one whose maximum interest rate is in the low twenties you may be
able to save a substantial amount of interest payments. You must make sure though, that they
report your payment history to the credit bureaus as this will help to improve your credit score
provided you pay on time.
Bad credit personal loan
Bad credit personal loans are issued by a variety of sources. Here again their emphasis will be on
charging you a high interest rate to cover the risk of your defaulting on the loan. Payday loans are
an example of bad credit personal loans that carry enormously high rates of interest as they are
calculated over a short time span and are designed to get you to the next paycheck.
Other types of personal loans include equity-backed loans. Let's say you have a home or some
other asset that is almost or fully paid off. Local and regional banks or home equity specialists will
lend you money using your asset as collateral. Although a loan of that nature will be safer for the
lending institution, your past credit history will force you into a bracket paying somewhere around
21%, despite the use of your collateral.
Bad credit mortgage loan
This is the big ticket item that will cost you dearly over the life of the loan. Consumers with credit
scores above 650 may find themselves paying say, six percent on their mortgage loan, depending
on the prevailing interest rates at the time of their purchase. If you have bad credit, you should be
prepared to pay two and a half to three percentage points more and sometimes into double figures
on your mortgage rate. Depending on the prevailing economic circumstances you may find it very
difficult to get a mortgage at any rate. You can expect that any lender looking at your loan
application will expect you to have a substantial down payment in hand, ranging from 10% to 20%
of the value of the home you are trying to purchase.
Not only should you expect to face a high interest rate, but also, your lender will require you to
purchase private mortgage insurance to cover the risk of your defaulting on a payment. If your
down payment is higher than 20% of the cost of the home you are buying, you may be able to
negotiate away paying PMI, even on a bad credit mortgage loan.
As with a bad credit car loan, your history of on-time payments will begin to raise your credit score
over time. Given a record of good payments, you may be able to refinance at a more reasonable
interest rate. But before you sign for your bad credit mortgage loan in the first place, be sure to
check the penalties for getting out of the loan early. Pre-payment penalties may be enormous and
most people are so excited to get a bad credit mortgage loan, they neglect to consider what may
change three years down the line.
Cleaning up bad credit items
Let's say your situation is so bad that you can't find a lender willing to risk lending you money.
Where do you go from here? You could wait a few years until bad credit items on your credit report
fall off, usually in seven years for most items. Or you could begin the process of cleaning up your
credit report as even a difference of a few points on your credit report score could make the
difference between getting a loan or a refusal. If there are items on your credit report that are
incorrect or should have been removed because of their age, write the credit bureaus and request
their removal. They are required by federal law to make those corrections.
Mistakes on your credit report can be caused by human error. An account with a bad history could
appear on your report because a clerk typed someone's social security number one digit off. Rest
assured, it happens. You could end up being saddled with someone else's court record but you
wouldn't know until you inspect a copy of your credit report.
Include the good news
If you have paid off a delinquent account in the past but it does not show on your credit report, you
will want to present proof of payment to the credit bureaus and have their records corrected. That
can mean a few points on your credit report score.
You may find that a car note you have paid off was never reported to the credit bureau and though
your payments were all on time, you are not receiving the benefits of that piece of good credit
history. Contact the lender and ask them if they will report your credit file to the bureaus.
A word of caution
Well-intentioned friends and family often "hear" that you should do this, or that, to raise your credit
report score and improve your chances of getting a bad credit loan. The most popular advice is
that you should close your credit card accounts. This may sound reasonable but may affect you
adversely. Make sure that if you take that route, you do not close the accounts with the longest
history. It may be safer to close newer accounts but you should know that part of your credit report
score is calculated by looking at the ratio of outstanding debt to total available credit. Close some
accounts, lower your available credit and your score could go down.
Douglas Michaels is an editor, publisher and columnist. He works in the financial industry and now
dedicates his time to helping others educate themselves on improving their credit scores. For
more tips on credit matters read his blog [http://www.my-credit-report-score.com/blog] or visit his
website at www.my-credit-report-score.com [http://www.my-credit-report-score.com]
Article Source:
http://EzineArticles.com/?expert=Douglas_Michaels
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