Bad credit gets a bad rap — and for good reason. It only takes a few serious mistakes to destroy your credit score; and while a credit score can drop rapidly, it can take years to repair the damage. In the meantime, a low score can stop certain job opportunities and result in higher insurance premiums.
It’s a bad situation to be in, but bad credit is not the end of the world. There are several untruths regarding bad credit, and it’s these myths that discourage some people from improving their credit history. They either feel that it’s too hard, or that their efforts won’t matter.
However, by distinguishing truth from fiction, you might find the motivation to fix your credit. Here are four common myths about bad credit.
1. You can’t buy a house
A good credit score can help you qualify for a mortgage loan and a good interest rate. However, a low credit score doesn’t always ruin the chances of finding a home loan. You might not qualify for conventional financing with a score under 680, but you may qualify for a home loan insured by the Federal Housing Administration (FHA), which only requires a minimum credit score between 580 and 620, depending on the lender.
Understand, however, that even if you’re approved for financing, you’ll pay a higher interest rate and the lender may require a higher down payment.
2. You can’t get auto financing
Everyone needs a car, but if you have bad credit, you may believe that paying cash is the only way to get a new set of wheels. This is not true. There are subprime auto finance companies that offer indirect financing, which might be your best bet when buying a car with bad credit. There are lenders like Consumer Portfolio Services that have certain programs for those with bad credit. Getting auto financing might be easier than you realize, regardless of your credit.
3. Everyone will know about a bankruptcy
Although a bankruptcy is public record, you shouldn’t overly stress about friends or relatives discovering that you filed for protection. Unless these individuals have reason to snoop around court records looking for your name, chances are that they’ll never stumble upon this information. Therefore, you can file Chapter 7 or Chapter 13 bankruptcy and feel confident that your information will remain private.
Also, there’s a myth that bankruptcy destroys any chances of getting a loan. Although a bankruptcy will reduce your credit score, most people fully recover credit-wise within 2 to 3 years, at which time they can purchase cars or homes with a reasonable interest rate.
4. You’ll only qualify for a high-rate credit card
Getting a credit card after a bankruptcy or another credit mishap is one of the best ways to rebuild your credit history. But there is a myth that bad credit results in a high-rate credit card. This is possible. However, many banks offer secured credit cards that feature low, competitive rates.
To get these cards, you need to pay a security deposit between $200 and $500, depending on the bank. Also, there are other fees, such as an annual fee, a monthly maintenance fee and a setup fee. Since these fees are charged directly to the card, you’ll incur a balance before making the first purchase with the card. It’s not the best terms, but since these creditors report to the credit bureaus, a secured credit card helps repair your credit history.
Even if you’re ashamed or embarrassed about a bad credit score, know that it is possible to improve your rating and demonstrate creditworthiness. You might deal with slow approvals and high interest rates today, but once your score improves, bank will consider you a desirable loan applicant.
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