That’s the conventional wisdom. So what do you do if you need a loan but have bad credit?
The basic analogy does make sense. Bad credit is like bad grades and bad recommendations. In all three cases, they’re understood to predict with a reasonable amount of certainty how well (or how poorly) you’ll be able to complete college, perform on the job or repay a loan. Your grades appear on your high school transcript, and that’s sent off to the college of your choice directly by the school, so you can’t change what it says. Your recommendations are generally communicated over the phone when a potential employer calls former colleagues, and you’re not invited to take part in a conference call, so you can’t contradict what they say. Your credit score is calculated by a credit bureau, also known as a consumer reporting agency. But there is something you can do to challenge it if they made a mistake.
There are three major credit bureaus in the United States: Experian, Equifax and TransUnion. Two smaller ones are Innovis and PRBC. They collect payment data on the financial obligations of virtually all consumers in the country. If you’ve been sent a bill, they’ll know about it. If you paid it, they’ll know about it. And if you didn’t pay it on time or skipped a payment, they’ll know about it. They monitor everything from utility bills to rent, telephone bills to alimony, parking tickets to speeding tickets. And they then analyze that credit history using a sophisticated algorithm to produce a credit score, which is analogous to your high school transcript and job recommendations. You are entitled, however, to view your credit score for free once a year. If they made any mistake (and they can), you are entitled to challenge it and request that they reevaluate your file. If you win, your credit score will likely improve.
In the majority of cases, however, Credit bureaus usually don’t err. When they assign a bad credit score they generally have sound statistical reasons to do so. So how can someone who indeed has a bad credit score do if he or she needs a loan? The answer is a short-term loan.
Short-term loans can range from a few hundred dollars to a few thousand, but they are enough to bridge a short-term gap in your finances. Because they are limited in scope, your payments will be affordable. And because they are re-paid according to a pre-arranged schedule, you know exactly how much you have to pay and when you have to pay it. That allows you to plan ahead by incorporating their repayment into your family budget.
The advantages of short-term loans do not stop there. They may also allow you to gradually re-build your credit rating. Some short-term loan providers report your repayments to credit bureaus and some do not. If you choose one that does, and assuming you repay your short-term loan provider on time and in full, the credit bureau learn of it. That, in turn, should induce them to periodically adjust your credit score upwards. Once you finish paying off your first short-term loan you can consider a second and then a third. As you faithfully pay each one of them off, your bad credit should eventually turn into good credit.