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Does having bad credit mean I’m being punished for bad financial habits?

It’s important to remember that having bad credit doesn’t always mean that someone was irresponsible. There are a myriad of life circumstances that can impact finances and set you back – such as unexpected medical bills, loss of employment, a natural disaster, etc. Having a low credit score can also mean that you’re simply just starting out, and have yet to build any credit. Bottom line: Many people find themselves having a low credit score through no fault of their own.

But regardless of the events that lead to it, there are some general side effects of having bad credit.

Higher interest rates

A lower credit rating could mean a higher risk for default. Lenders may compensate by setting interest rates higher to protect their investment. So, borrowing a large amount could mean paying a large amount of interest over time.

Difficulty getting approved altogether

If you have an unusually low credit score, you may see few lenders willing to take a chance on approving you for a loan or credit card.This is a realistic situation that many with no credit find themselves in – such as a student, applying for a loan. In this case, getting a cosigner is usually the route to take.

Difficulty renting a place of residence or getting a phone contract

Even if you’re trying to rent a place of residence or sign a phone contract – neither of which would call for a loan – having bad credit could still potentially slow things down. This comes as a surprise to some because they think agreeing to pay the bills in cash should nullify the credit risk. But landlords and phone companies could in fact check your credit before agreeing to do business with you.

Paying more security deposits

Utility companies – similar to landlords and phone providers – can check your credit as well. You may be asked to pay a security deposit, or a higher security deposit, depending on your credit score and the company’s policy. Since you wouldn’t be paying interest on utilities, the one-time fee upfront works the same as insurance would for the provider.

Choosing a bad credit lender

Despite the difficulties, having a low credit score doesn’t mean getting a loan is impossible. What it does mean is you may need to utilize a little more strategy in selecting a lender. You can be approved through a short-term lender, online lender, bank, or credit union. You have plenty of options to choose from, and convenient ways of searching for them. But if you decide to do a little more digging on your own, it helps to know where to start.

Competitive interest rates are only one piece of the puzzle. Your goal is also to identify supportive resources that help you chip away at debt and ultimately get back to building your credit score. Here are a few things to think about when considering your options:

Types of bad credit personal loans

Installment loans: These loans don’t have any collateral attached, but do require you to pay through amortization, which are equal monthly installments over the predetermined loan term.

Payday Loans: Also don’t require collateral, but you must repay by your next payday. For this reason, they are usually short-term loans with high APR.

Cash advances: Similar to payday loans. Cash advance lenders most likely won’t check your credit, but these are most useful if you have a credit card or steady income. Not available in all states.

Bank Agreements: Per your bank’s policy, they may approve you for a short-term loan or minimal overdraft agreement. This is of course dependent on your banking history and ability to keep your account open.

3 life events that may call for bad credit loans

Consider some practical reasons why getting a bad credit loan could be a better choice than some of the more common ways of dealing with financial problems.

Building your Credit Post-Bankruptcy

Filing for bankruptcy is a decision that shouldn’t be taken lightly. While it can help to stem the tide of debt you find yourself in, it can certainly cause your credit score to take a major hit. However, many have bounced back from bankruptcy. The key is knowing when to take the first step.

Bankruptcy in the US

Source: https://www.statista.com/statistics/303570/us-personal-bankruptcy-rate/

Understanding what’s gone and what’s left over

Bankruptcy has a tendency to feel like the end, not a beginning. It’s natural to have doubts when you’re having financial problems, and the hardest part can be accepting the realities and feeling confident about the future. Or, you might be looking at things from the other side – relieved that so much debt has been lifted.

The truth is, filing for bankruptcy is more like taking a life raft than an escape hatch. There are still some debts that you’re responsible for repaying, even after filing. It’s important to know which debts bankruptcy can touch, and which debts it can’t.

Chart your course

Bankruptcy doesn’t stay on your credit report forever. Once it’s discharged, you essentially have a clean slate to rebuild your credit score. However, the costs involved with filing shouldn’t be taken lightly either. Putting together a step-by-step action plan following bankruptcy is highly recommended, if only to avoid trying to do too much too quickly.

Developing good habits with credit and spending can help you bounce back from bankruptcy. Here are a few of the essential steps:

Make a budget – Track your expenses for three months and create a budget around your monthly income. When you can, establish an emergency fund.

Pay all bills on time – Even after filing for bankruptcy, your payment history is being tracked.

Beware of scams – Stay away from anyone offering to repair your credit post-bankruptcy for a fee. Only you can build your credit, and it’s free.

Stay positive

Your eligibility for a loan post-bankruptcy will most likely be scrutinized. Your employment status, income, and ability to manage repayments means everything when it comes to being approved. Your assets could also be a factor, as you’ll most likely be required to provide collateral. If you had to file for bankruptcy due to unemployment, you could start with a manageable cash advance or some other short-term agreement. The key is to keep chipping away at your debt until you can build a good foundation in its place. Keep in mind that bankruptcy, while initially damaging to your credit score, doesn’t have to undermine your financial future.

Common suggestion: Get a secured credit card

Whether you file for Chapter 7 or Chapter 13 bankruptcy will determine the amount of time it will appear on your credit score (7-10 years). Some financial advisers suggest opening a secured credit card account will help you build credit quickly after the bankruptcy is lifted from your report. That’s true, but any interest rates and annual fees attached could also put you at risk of falling into more debt.

Why a bad credit loan could be a better choice

Most credit unions and banks want to see at least 12-24 months of solid payment history before approving you for any kind of secured method of building credit. Getting a bad credit loan can help you establish some consistent payment history without having to worry about annual fees plus interest. Be prepared for lenders to see you as high-risk. But if you can find an affordable loan and repay it, you can begin to get your credit score back on solid ground.

Funding for Disabled Veterans in need of Home Modifications

The U.S. Department of Veterans Affairs (VA) provides the most comprehensive economic and health-related assistance for vets and their families. However, there are some limitations. According to the U.S. Census Bureau, a total of 3.8 million veterans had a service-connected disability rating as of 2014.

Service-connected disabilities are wide-ranging, but consist of a disease or injury obtained during active military service. While not every individual faces the same problems after service, the top three economic challenges tend to be unemployment, poverty, and homelessness. Veterans with service-connected disabilities, who are in need of specific home modifications and medical treatment are among the most at risk of experiencing some kind of debt that can lead to bad credit.

Government assistance for veterans

There are various resources for veterans with debt. One example is called the VA Medical Care Hardship Program. In addition to receiving help with some copayments related to medical treatment, veterans can also benefit from existing debt waivers. While programs like these largely make approvals based on service rather than credit history, there are still some strict eligibility requirements attached – i.e. you need to submit a letter for review, outlining your financial hardship. And this mostly applies only if your gross household income has decreased.

Grant eligibility

For service members and veterans who are living with a family member, there are three VA housing grants that allow for home modifications to the family member’s home:

1. Specialty Adapted Housing Grant
2. Special Housing Adaptation Grant
3. Temporary Residence Assistance Grant

However, like the larger health benefits programs, the scope of eligibility can be narrow. Below are the specific details of each grant.

What parts of the house qualify for renovations?

1. Bathrooms, kitchens, and bedrooms
2. Covered porches, ramps, and walkways
3. Garages, carports, and passageways
4. Doors, windows, and flooring materials
5. Security items
6. Concrete or asphalt walkways
7. Sliding doors, handrails, and grab bars

Common suggestion: Apply for a VA loan

A VA loan can certainly be a viable option for veterans and active service members, specifically when it comes to purchasing a home. Benefits such as no down payments or required mortgage insurance are attractive. However, other specific medical and physical needs of some veterans with disabilities may be tough to meet if they don’t match a specific criteria or time of active duty. There’s a chance many may not be approved.

Why a bad credit loan could be a better choice

Despite the idea that VA loans aren’t as stringent when it comes to credit scores, most lenders would actually like to see a score of 620 or higher for approval. With a bad credit personal loan, veterans with service-connected disabilities, debt, and credit scores below 620 won’t have to put all their eggs in one basket. It can also widen some of the eligibility lanes and provide some financial relief more quickly.

Dealing with Debt after Divorce

Divorcing your spouse can be an overlooked source of long-term financial strain. Some of the financial decisions made during marriage aren’t so easily navigated once you’ve decided to part ways. While a divorce doesn’t show up on your credit report, your score could suffer some residual effects depending on any debt incurred during the marriage, as well as attorney fees and other costs.

Apart but not alone

Divorce, like bad credit, can cause feelings of loneliness and anxiety. Much of it stems from regret, especially for those who weren’t financially independent during the marriage. The first thing you should know is that you’re definitely not alone. The process isn’t easy. Neither is finding a way to both educate yourself about your finances and re-establishing some healthy financial habits. It’s also important to note that while you might be divorced from your former spouse, keeping your financial partnership intact is ideal when tackling some combined debt.

You’re not alone.

After divorce:

What combining debt means during marriage and after divorce

It’s considered a myth that any debt you incur individually will automatically merge with your spouse’s debt after marriage – making both of you liable for all of it. It’s not so much a myth, but rather an overly generalized view of what can actually happen. If you or your spouse incur any debt during the marriage, joint liability will ultimately depend on where you live.

Most states will follow one of two rules when looking at debt within marriage:

Community Property – where income and most debts incurred by one spouse during marriage are owned by “the community” – both spouses.

Common Law – where most debts incurred by one spouse during marriage are owned by that spouse alone. (Exceptions to this rule are any debts that fall under “family necessity” – i.e food, shelter, medical expenses, and school tuition.)

Community property map

Source: https://www.nolo.com/legal-encyclopedia/debt-marriage-owe-spouse-debts-29572.html

This is important, because creditors in community property states can seize a couple’s assets to pay off debts, even if the debt was incurred by one spouse. While the rules vary by state, most will follow common law rather than community property. But a lot depends on how you and your spouse choose to handle the family finances.

Source: https://www.experian.com/blogs/ask-experian/survey-results-when-divorce-does-damage-to-your-credit/

Essentially, there is nothing that legally binds you to all of your spouse’s debt. However, many divorcees note that they had different expectations of their spouse’s spending habits than what occured in reality. Red flags that show up on things like joint bank accounts or joint credit card accounts can create problems that linger after the marriage ends.

Whether or not spending habits played a role in the divorce, you may find yourself struggling with unpaid bills and an ex-spouse who unfortunately isn’t carrying their weight to pay their share of the debt. As a result, your credit score takes a hit.

The cost of divorce

Source: https://www.experian.com/blogs/ask-experian/survey-results-when-divorce-does-damage-to-your-credit/

Even though the outcome is the same, not all divorces are created equal when it comes to the details. The ideal scenario would result in a quick, low-stress, and relatively painless process that keeps costs as low as possible. Unfortunately, that’s not always the case. Decisions such as renting your next place of residence vs. owning, hiring a divorce mediator vs. separate divorce lawyers, and moving out of state after the divorce vs. staying local can mean a difference of thousands of dollars in expenses. Putting these expenses on a credit card to avoid dipping into your savings might seem like a logical solution, but it could prove to be just a Band-Aid instead of an eraser.

A large piece of the cost will come down to whether the divorce is uncontested or contested. An uncontested divorce means both parties agree on the details of the separation, and can generally take care of everything for a few hundred dollars. A contested divorce means you can’t agree on all the issues to adequately move forward, and a neutral third party needs to be involved. Divorcing couples commonly hire a mediator if large assets or children are in the picture. Mediators tend to charge an average of $100 to $150 per hour, depending on the complexities of the situation.

Issues negotiated through mediation include:

• Child custody/support
• Taxes
• Retirement
• Assets
• Liabilities

Mediation is certainly cheaper than litigation. And keeping your divorce out of the courts can spare all parties involved some emotional and mental stress. The bottom line is understanding all costs involved with divorce can help to shape your thinking about financing and the effects on your credit.

Common suggestion: Sign a prenuptial or postnuptial agreement

If a couple decides to divorce, the related costs are unavoidable. Though it’s difficult to really prepare because you can’t predict the future – and going into marriage with your mind on divorce could be a downer. But many do choose to go the prenup route to fend off any potentially ugly litigation. Postnuptial agreements are no different, other than the agreement is made after the couple is married. Couples tend to consider a postnup if divorce is on the horizon and they want to agree to keep costs as low as possible before proceeding.

Why a bad credit loan could be a better choice

Though a nuptial agreement can help with some divorce-related costs, it’s no guarantee that you won’t incur debt as a result of the divorce. It also has no bearing on any unpaid debt that’s incurred during the marriage. Your credit score could already be in the red by the time of your divorce, and a bad credit loan can help you to navigate the beginning stages of a challenging season.

Protecting your credit score after laying fresh ground

Building credit and protecting your credit score aren’t always synonymous, but they are related. Once you’ve regained some financial footing via a bad credit loan (and you will), you can then continue to practice good habits and set up protections around your credit score. Three quick tips:

Make automated payments: Start with setting up automatic payments for your bills through your bank. This will relieve the burden of having to remember due dates. And it will get you into a consistent a rhythm of repayment, which is music to a creditor’s ears.

Cash in, cash out: Be strategic with your credit cards and pay for more using cash. Your budget shouldn’t allow you to spend beyond what you earn. Using cash will help you keep track.

Keep an eye on your accounts: Even when you’re not overly active, continue to check your FICO score and credit card accounts regularly. This will help you maintain an ownership mentality and keep annual fees from sneaking up on you.

It’s about Beginning Again

Starting over financially most likely means starting over personally in some areas as well, and that’s nothing to be ashamed of. A lack of knowledge, adequate resources, or access to funds to pay off debt can have a swift impact on your credit score. But remember, bad credit doesn’t have to be final. You still have options toward building a functional financial life; and a bad credit loan could be a viable one.