3 Signs You’re Ready to Graduate from Bad Credit Loans
You Can’t Afford the High Interest Rates and Fees
The average APR on a payday loan is a whopping 391 percent — if you can manage to pay the loan back in a two-week period. But about 80 percent of payday loans end up getting rolled over or renewed, which leads to mounting interest and fees. And some states have looser borrowing restrictions that lead to higher rates. For example, APRs can reach 652 percent for payday loans in Idaho. Other bad credit loan products aren’t much better. Title loans, which are short-term loans secured by the title to your vehicle, have APRs that work out to 300 percent. And about one in five title loan borrowers lose their vehicles to repossession as a result of default. Pawn shops are the safest of these three alternative financial services — but you still risk losing a valuable possession for a loan worth only 25-60 percent of its resale value if you can’t manage the triple-digit APR.You’re Ready to Take Control of Your Finances
Those high interest rates and fees can leave you trapped in a cycle of debt. You may be borrowing regularly just to pay off your previous debts, your income stretching thinner as you put more money towards interest. You may be struggling to afford essentials like food and rent. If you’re tired of drowning in debt and have goals for saving and budgeting, you’re ready to graduate from bad credit loans.You Need Revolving Credit
If you have cash flow issues due to inconsistent income, you may need to borrow money sometimes. But if you use bad credit loans in your time of need, your financial situation could get worse. Credit cards offer a grace period, which gives you some leeway between when you buy things and when you pay for them. As long as you pay your statement balance each month, you won’t incur any interest. If you think a credit card would help you manage your cash flow, you’re probably ready to graduate from bad credit loans.How to Graduate from Bad Credit Loans
When you’re ready to move on from bad credit loans, you’ll need to take steps to improve your credit until you qualify for safer loan products.- Get more income and pay down debt: If you can pick up a second job or side hustle and use the extra income to pay down debt, your credit score will improve. Your higher income will also make it easier to qualify for a loan with a better rate in the future.
- Use a secured credit card: A secured credit card requires a deposit, which typically determines your credit limit. For example, if you deposit $500, you’ll be able to spend up to $500 on your credit card before paying your bill. Be sure to use the card once per month and make an on-time payment to build credit. And be aware that some secured cards also come with an annual fee.
- Get a credit-builder loan: With a credit-builder loan, you make a deposit that is returned to you once you’re finished making monthly payments. This is best for people with no credit history rather than those with existing debt. If you have other debt to deal with and neglect that debt to pay off your credit-builder loan, it likely won’t have much of an effect on your credit score. In fact, an analysis from the Consumer Financial Protection Bureau found that people with outstanding loans saw their credit scores decrease after using a credit-builder loan.
- Become an authorized user: If you have a creditworthy friend or family with a credit card account, ask to be an authorized user on their account. Their on-time payments will improve your credit score.
- Cosign a loan: Another option is to ask your creditworthy friend or family member to cosign a loan for you. They’ll be on the hook for the cost if you default, so be sure to stay financially responsible, or you may harm your relationships.
- Take out a no credit check installment loan: If you need to borrow money and want to build credit at the same time, a no credit check installment loan is a safer alternative to other bad credit loans. Interest rates can still reach the triple digits, but you’ll have a longer term for repayment. The best online installment lenders also report on-time payments to the three major credit bureaus, so as you pay off the loan, you’ll see your credit score improve.