Bad credit, no credit, no problem?

We've all heard the commercials with sales people saying, just come in to our lot - you're pre-approved! But once you're there, there is plenty of fine print to carefully review before making a decision. Let us break down this common catchphrase to give you a better understanding of just what it means.

Bad Credit...

What exactly does it mean to have bad credit? Your credit score is what lenders use when making decisions about you, so it's really important. There are several different credit scoring models, but FICO is the one used most often by lenders when evaluating your credit. This is a number from 300 to 850. Typically, any score 750 or better is considered excellent; scores from 700 to 749 are considered good; fair is from 650 to 699, and poor is between 600 and 649. A a “bad” score will fall below the 600 mark.

No Credit...

Some people don’t have bad credit, but instead they have no credit. The most frustrating thing about credit might be the chicken-and-egg problem of establishing it: Nobody wants to give you credit when you don’t have a track record of using credit. If you are just starting out and your file doesn’t contain enough information to generate a score, you are considered a credit "ghost." This usually makes it very difficult for a lender to determine your creditworthiness.

No Problem?

It truly may not be a problem to get financed for a loan if you have bad credit or no credit. But, you will need to go to the right place, and meet certain requirements to do so. If you fall into either category, bad or no credit, there's a good chance you will need a subprime lender, a third-party that finance loans for consumers with credit challenges. These lenders will judge your application based on three main factors: ability, stability, and willingness to pay.

The Bottom Line

Before you jump into an agreement, make sure to read the fine print to evaluate if the "deal" is something you should really do. A subprime lender may be able to get you into a loan, but take into consideration that you will have a higher interest rate, and will most likely be required to make a down payment. If you are properly prepared, a loan can help you improve your credit. By making your payments in full and on time, you will begin to see improvements in your credit score over time.