Life is full of the unexpected, especially when it comes to costs and expenses. Loans can offer you the ability to get the funds you need when you’re low on cash and an emergency arises. But what options are available when your credit score is low? We’ll take you through the different credit score ranges, the best loans for bad credit, and how to apply for a bad credit loan.
Overview:
- What is a bad credit score?
- Best personal loans for bad credit
- How to apply for a loan with bad credit
- FAQs
What is a bad credit score?
In New Zealand, credit scores are typically provided by three main credit reporting agencies: Centrix, Illion, and Equifax. Each agency might have slightly different scoring ranges and criteria, but generally, credit scores fall into the following categories:
| Credit reporting agency | Excellent | Very Good | Good | Average | Below average |
|---|---|---|---|---|---|
| Centrix | 892 | 825 – 892 | 706 – 824 | 496 – 705 | 496 |
| Illion | 800 – 1,000 | 700 – 799 | 500 – 699 | 300 – 499 | 1 – 299 |
| Equifax | 853 – 1,000 | 735 – 852 | 661 – 734 | 460 – 660 | 0 – 459 |
Are loans bad for credit scores?
Loans themselves are not automatically bad for credit scores. Instead, whether they positively or negatively impact your credit score will depend on how they are managed.
A loan may have a negative impact on your credit score when you:
- Make late payments or miss payments
- Take on too much debt in relation to your income
- Apply for multiple loans in a short period resulting in several hard inquiries on your credit report. Hard inquiries can temporarily lower your credit score
- Default on your loan
You can reduce or avoid the negative impact a loan has on your credit score by:
- Only borrow what you can afford to repay
- Making payments on time or by paying your loan off early
- Checking your credit score and credit report for any errors or discrepancies
- Avoiding incurring too much debt and ensuring you are always earning more than you are spending
The bottom line is that responsible borrowing can build a strong credit history and improve your credit score. But poor loan management and loan defaults can harm your credit score. So, ensure you always assess your financial situation and borrowing needs carefully before taking on new debt, and ensure you manage any debt correctly.
Best personal loans for bad credit
Although having a low credit score can make loan approval more challenging, there are options available that cater specifically to borrowers with a low credit score:
- Credit unions: credit unions often have more flexible lending criteria than traditional banks and will look beyond your credit score to determine your eligibility.
- Online lenders: there are online lenders who specialise in bad credit loans and who often have more flexible lending criteria. These lenders may have higher interest rates.
- Secured loans: if you have an asset such as a car or property, you may be able to use this as collateral for a secured loan. However, you risk losing the asset if you default on the loan.
Is a loan right for you?
Whether or not a loan is right for you will depend entirely on your individual circumstances and each lender’s terms and conditions. To ensure you’re making the best choice for your situation, make sure you ask yourself:
- What is the comparison rate?
- Are there any extra fees or hidden costs associated with the loan?
- What can you reasonably afford to repay? What repayment amount seems manageable?
- Have you read and understood all the terms and conditions?
- Are there any early repayment penalties or fees should you want to repay the loan early?
How to apply for a loan with bad credit
Applying for a loan with bad credit follows a similar process to applying for any other loan.
Step 1. Check your credit report
You can obtain your credit report for free from New Zealand’s three main credit bureaus; Centrix, Illion, and Equifax. Check for any errors or inaccuracies that may bring down your credit rating and dispute them if needed.
Step 2. Assess your credit score
Know your credit score and understand where you stand. This will help you target lenders that are more likely to approve your application.
Step 3. Assess your financial situation
Evaluate your monthly income and expenses to determine how much you can afford to borrow and repay. Ensure you calculate your debt-to-income ratio to understand your overall financial health.
Step 4. Research and compare lenders
Ensure you research and compare a range of lenders to ensure you get the best loan for you.
Step 5. Prepare your documents
You will likely need several documents when applying for a loan, including:
- Proof of identity, such as a driver’s licence or passport
- Proof of income, such as recent payslips, bank statements or tax returns
- Proof of address, such as a utility bills or rental agreements
- Information on any existing debt or liabilities
Having the above documents ready to go can help prevent delays with your application and help you avoid being declined due to any missing information.
Step 6. Submit your application
Once you have all your documentation together and have ensured all your information is complete and correct, you can submit your application. Most lenders will offer online applications, and some will also offer in-person or over-the-phone options.
Step 7. Repay the loan
Once you have been approved, it’s time to repay the loan. Ensure you make timely payments to avoid any negative impacts to your credit score.
In need of funds but concerned about your credit score? Apply with Swoosh today!
For a lender that looks at more than just your credit score, apply online with Swoosh today!
FAQs
Are credit cards bad?
Credit cards are not inherently bad, but their impact on your financial situation will depend on how you use them. To ensure you are using your credit card responsibly, consider the following:
- Pay full balance monthly: avoid paying interest by paying off the full balance each month.
- Use for emergencies only: only use your credit card for emergencies or for things you actually need, rather than want.
- Keep a low limit: keep your credit limit as low as possible to avoid overspending.
- Track spending: monitor your credit card spending to stay within your budget.
- Use rewards wisely: take advantage of rewards and benefits without overspending.
- Set up payment reminders: ensure timely payments by setting up reminders or automatic payments.
- Limit credit applications: only apply for new credit cards when necessary.
Why can’t I get a loan anywhere?
There are a number of factors that could make it difficult to get a loan, including:
- A poor or insufficient credit score
- Inconsistent or insufficient income
- Lack of employment or unstable employment
- Errors in your loan application or an incomplete application
- The loan amount is too high when compared with your financial circumstances
- Too many recent credit applications
Are payday loans bad for credit?
As with most types of loans, the effect a payday loan has on your credit score will depend on how you manage it. Ensuring you never borrow more than you can afford and paying your loan off on time (or early) with regular payments will help prevent any negative impact to your credit score.
