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How to handle lousy credit

If you've flunked the credit scoring test and been rejected by one institution, don't despair. There could be other lenders with different criteria, and some may be willing to give you mortgage, auto loan or even a secured credit card – for a price.

Why do some lenders say "no" when others say "yes"?

All lenders make a judgment about character (your willingness to repay), capacity (your ability to pay) and collateral (the value of what you are buying) when deciding to grant you a loan. There are several tools that aid lenders in making this judgment, including automated credit or risk scores. In some cases, these scores replace human decision making. As a result, separate lenders can look at the same loan and view the same credit risk differently.

If your loan application met with "no" at one lender, there may be another lender out there whose credit risk criteria is different. If so, they may have a loan for you.

  • In the case of a mortgage or auto loan, it may mean going into the sub-prime category. Sub-prime lenders specialize in handling risky borrowers, and you'll pay for your poor credit record with higher interest rates, higher upfront fees, or both.
  • For credit cards, there also are issuers that handle poor credit risks, with higher fees and rates. Or you can try a secured credit card.


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Your first step upon rejection is to exercise an important right available to you under the Truth in Lending law: Find out why you were rejected.

  • If you were rejected because of information supplied by a credit bureau, get a new copy of the report. Even if you did your homework and tried to get a mistake or bad credit mark changed or removed, it doesn't mean the credit bureaucracy didn't make a mistake. Remember: Under the Fair Credit Reporting Act, you may not be charged for a copy of your credit report if you request it in writing within 30 days after being rejected for a loan. Find out which bureau supplied the report used to reject you, and get your free copy. If there's a mistake, go back through the procedures for settling a dispute.
  • If you're applying for a mortgage, ask your lender for a copy of your Residential Mortgage Credit Report, which is more detailed than a regular credit report. Credit bureaus issue these reports, too, which cover your credit for the past seven years.

If there is no error, and you simply can't qualify for credit, consider joining a credit union. Often credit unions are more lenient toward members they already know.

Mortgages
Several lenders specialize in handling borrowers with less-than-prefect credit. Click here for a list of those lenders.

Auto loans
For many car buyers, the dealer often can find a lower interest rate, or arrange financing for buyers with special problems.

Car dealers have become middlemen, receiving some profit from arranging car loans. The dealer may shop a potential buyer's loan application with as many as 30 different lenders. To get the dealer's business, a bank may offer special rates or take on a risky borrower who the bank normally would reject. Unless the car buyer has perfect or near-perfect credit, the dealer is in a better position than the buyer to negotiate an auto loan, because the bank wants the dealer's car loan business.

But just because your credit isn't spotless, don't let the dealer take you for a ride on financing. You still should shop around and make sure you don't end up buying unnecessary extras, such as extended warranties or overpriced credit life insurance. Myvesta, an Internet-based nonprofit debt counseling agency in Gaithersburg, Md., describes how car dealers may up the ante for those with a tainted credit history in a guide: How to Buy a Car With Marks on Your Credit and Not Get Taken for A Ride.

Credit cards
Several credit card issuers carry customers with poor credit histories, and charge higher rates and fees for the privilege. You probably don't have to look far to find a credit card issuer willing to take you on – start with your mailbox. Consumer advocates have been complaining for years that card companies send out "pre-approved" card applications to many people who shouldn't be taking on new debt.

Another option is a secured credit card. With a secured card, you secure your credit card by depositing money, generally equal to the amount of your credit line, in a savings account or CD. However, your card issuer maintains a lien on the deposit account, which you stand to lose if you fail to make timely credit card payments.

In considering a secured card, try to avoid steep application and annual fees and unusually high card rates as high as 21 percent. The range in a recent survey varied from an average 9.72 percent to 20.05 percent and annual fees ranged from $18 to $45.

Also, make certain you are getting a fair savings account rate for the amount of time you plan to be tying up your money. It's important to find out when your card issuer plans to re-examine your account to determine whether you qualify for an unsecured credit line. It should not be longer than 18 months after you apply. More banks than ever are offering secured credit cards, so it pays to shop around.

-- Posted: Jan. 9, 2003

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