Best Bad Credit Loans
Based on In-Depth Reviews

Credit Scores Today 

According to the FTC's Bureau of Consumer Protection, a credit score is a system that creditors use to determine the risk they will be taking on by lending to you. The credit scoring system is used to determine what products will be available to you and on what terms, meaning a higher credit score will get you lower rates, while a lower score will get you higher rates. But shouldn’t you know this by now? You would think it’s common knowledge, but we don’t take classes on “How To Manage Your Credit Responsibly” in school (at least we didn’t). That's where this guide comes in handy. Here we’ll be breaking down all things credit score and credit report-related. 

We interviewed Bruce McClary of the National Foundation for Credit Counseling to get insight into the industry from a credit expert. He states: “A credit score, according to the FICO scale, is based on a number of different elements, and the most significant element determining a person's credit score is how they’re paying their creditors and the history of those accounts. So if the person is making their payments on time, that reflects in the credit score that they have been making timely payments. 

Those make the most significant difference. 35% of a FICO score is determined by this one factor. So if a person has damaged credit or if they have a low credit score it could be either because of a lack of history or because they have accounts that haven’t been maintained properly."

The other key factors that make up your credit score are: how much debt you owe (30%), the length of your credit history (15%), the number of new credit lines you open (10%), and the diversity of your credit lines (10%). Added together, these percentages make up the totality of your score. Poor credit is in the range of <580, fair credit scores are considered to be between 580 and 669, good scores range from 670-739, very good scores are between 740 and799, and excellent credit scores are upwards of 799.

McClary goes on to explain that " when someone wants to rehabilitate their credit score to get it to a healthier level, it depends on where they’re starting from. If they have a thin credit file and they don’t have much credit history, it’s all about building a healthy credit history, making sure that you’re opening accounts that are manageable and that can be maintained with timely payments so that you can start to raise your credit score.”

And according to our research, the average American has racked up a significant amount of debt, with the national average being $38,000 per person. Northwestern Mutual’s 2018 Study and Progress Report states that, on average, Americans spend 36% of their monthly income on debt repayment and 37% on discretionary expenses such as eating out, nightlife, clothing, and personal care.

Credit Reports

It is important to note that, contrary to popular belief, your credit report is not the same thing as your credit score. When you request your updated credit reports, they will not include your credit score, but instead, show you a snapshot of your credit history.

According to TransUnion, your report will show your account summary, your personal info including your SSN (make sure another person’s information is not linked to your account), credit inquiries (too many can impact your score negatively, and if you don’t recognize a lender it can be a sign of fraudulent activity), credit cards and revolving accounts, mortgage/ installment loans, and public records (which can include bankruptcies for up to 10 years).

Checking the accuracy of your credit report is important. Federal law states that consumers can get an annual credit report from each of the 3 major credit reporting agencies. You can use the FTC website to order your free credit report online or under the Fair Credit Reporting Act, request your credit scores from the three credit reporting agencies for a fee. Once you’ve purchased your score, you'll get instructions on how to improve it. 

How Can I Rebuild My Credit?

As we mentioned previously, there are many reasons and life situations that lead to a bad credit standing. When we asked Dr. Kurt Schindler, Certified Financial Planner ® and tenured professor at the University of Puerto Rico, Río Piedras Campus about the healthiest alternatives for improving credit scores, he had some enlightening insight.

Dr. Schindler comments that “working on the credit is the easy part, but changing the habit is the much harder part. It’s like dieting, you really don’t want to, so when people ask me about credit building products I think the one I’m most comfortable with is a credit builder loan where you’re making payments to yourself. Or alternatively, where you have a cash collateral against a credit card, where if you don’t pay, the bank already has the funds. So essentially, you’re taking out a loan against your own money.” 

We believe it’s important to highlight that changing your financial habits is key in the process of rebuilding your credit. Before you start this process, it’s important to request your three annual credit reports to rule out any mistakes or fraudulent activity. If your credit report does have mistakes, contact the credit agency. Thanks to the Fair Credit Reporting Act, credit agencies and information providers are responsible for correcting any mistakes on your report. 

You can use this sample letter for credit agencies and this sample for information providers. These sample letters are from the FTC Consumer Information Resource. Afterward, you need to review all your loans with late payments or in delinquent status. If you have any loans with delinquent status, contact the collectors to arrange repayment. A bad credit loan won't do much help if you’re not taking care of the accounts that are weighing down your score. 

After you’ve done this, your next steps should be paying your bills on time, keeping your balances low, not maxing out on your credit cards, not requesting too many loans or lines of credit that require hard credit pulls and avoiding unnecessary big purchases. If you’re considering a credit repair company, take a look at our most recent review on the subject. 

Finally, set out to create a budget that takes into account your monthly income and expenses. Here’s a basic template from the FTC to get you started. As personal finance guru, Dave Ramsey says: “A budget is telling your money where to go instead of wondering where it went.” 

National Foundation for Credit Counseling

As we searched the web for resources to guide consumers on their credit journeys, we discovered the NFCC. The National Foundation for Credit Counseling is the longest-running nonprofit helping people get on track to rebuild their credit histories. NFCC partners with different agencies that guide consumers with debt management plans, credit report reviews, homeownership counseling, reverse mortgage counseling, foreclosure prevention counseling, and bankruptcy counseling. You can schedule an appointment with one of their partners by calling (800) 388-2227 or directly on their webpage.

Types of Lenders

As we’ve previously explored in our Best Personal Loans review, there are pros and cons to working with different types of lenders. For the purpose of this bad credit loan review, we’ll focus on online lenders, banks, and credit unions. As we mentioned before, working with your local bank or credit union could work in your favor, as they're familiar with your income and payment history. They are also a great option for a low-rate credit-building loan, where you’re making payments to the total amount until you pay it off and get the funds. This is a great option for making positive marks on your credit score. The major con about working with a credit union is that you must be a member and have payment history to apply.

The benefits of working with your local bank are that they are also familiar with your credit history and account details. Banks are also more strictly regulated than online lenders, which can result in lower interest rates and fees. Conversely, working with an online lender can prove to be much easier and has become an increasingly popular option for borrowers. The cons of working with an online lender are that, although they have faster funding times, you might not get the personalized treatment you'd receive at a brick-and-mortar branch and you might get higher rates.