A credit score is a snapshot of an individual’s past history of financial payments.
This is a three digit number ranging from 300 to 800 and this number is calculated based on the credit report of an individual.
If the individual has a history of making all loan payments in time, then he or she is likely to have a higher credit score.
On the other hand, if an individual has a history of defaulting on payments, then his or her credit score is likely to be low.
This credit score is used by banks to judge the credit worthiness of the individual when they are processing the loan application.
What this effectively means is that the individual may find it harder to get loans if his or her credit score is low.
A person with bad credit may find it very difficult to obtain loans and even the loans that are given will carry a huge rate of interest. In most cases, it is the maximum rate of interest that can be levied according to the laws of the state.
There are two kinds of loans that are available to people with bad credit.
The first kind is a secured loan in which the individual has to pledge some security that will be used as collateral against the loan.
If the individual defaults, then the security will be sold by the bank and the proceeds will go towards the loan.
The other kind is the unsecured loan that does not require collateral.
These loans are also called as signature loans because the loan is given after a signed promise by the borrower to repay the loan.
The rate of interest will be the maximum for this loan because the banker has no other recourse in case of default except to resort to collection agencies.
In order to secure a signature loan, the first step is to get the financial house in order. All efforts must be taken to improve the credit score.
If some of the past unpaid payments are paid, the credit score can improve marginally. Every improvement can bring the rate of interest down.
Also, credit cards must be paid off as much as possible. Apart from this, the monthly expenses must be regulated so that the individual is better-prepared to meet future financial contingencies.
Once the loan is approved, the borrower must pay the monthly amount along with the interest on time without any delay.
Once the loan is paid off fully, the credit score of the borrower will improve and this can be a blessing when another signature loan has to be borrowed anytime in the future.