Where does bad credit come from? Contrary to what some people may believe, bad credit is often no one’s fault. Health problems, layoffs or cut hours, and family emergencies can all lead to spending that cannot be avoided coupled with lost income. This is a perfect storm for missed bills, collections agencies, and evictions, all of which can destroy your credit score.
Although it is possible to take steps to raise a credit score and repair a credit history, rebuilding credit takes time and patience. Collections accounts remain on your credit history for seven years. Keep in mind that this is measured from the time they were sent to collections so if you had an account that was outstanding for six months before it went to collections, the seven years only starts after the collections process started.
In the meantime, you have essentials that you need to survive. About half of Americans live paycheck to paycheck. Finances become even tighter when you are trying to rebuild credit and pay off creditors. But you cannot live in a bubble while you get caught up financially. Your car will need repairs, your kids will need vaccinations, and you will need to replace your water heater. What options are available when you have bad credit and you are either rebuilding credit or trying to stop your credit from getting worse? Here are four ways to pay for essentials when you have bad credit:
Lease Purchase Programs
While not necessarily intended for bad credit financing, flexible lease purchase programs are a form of no credit needed financing that does not require a credit check. Moreover, since the payment plan is structured as a lease rather than credit, making payments on time will actually improve your credit score.
The way these bad credit financing options operate is that the leasing company works with the seller to pay for your purchase. The leasing company then leases the purchase to you for a fixed fee, typically a monthly rent or lease fee. As long as you make all your payments on time, the purchase belongs to you at the end of the lease.
These bad credit financing programs work well for large purchases. Most Americans do not have the savings needed to withstand a $4,000 emergency like a broken water heater or furnace. Bad credit financing through lease purchase programs allows consumers to make these essential purchases.
Credit cards are convenient, but are often very expensive finance options for consumers with bad credit. As of October 2019, people with fair credit (the lowest credit rating eligible for credit cards) were being charged over 22% interest on their credit cards. On a $1,000 balance this means that you would pay well over $200 per year just in interest.
Furthermore, this assumes that a credit card company would approve your credit application. Fair credit corresponds roughly to a credit score of 580 to 670. A bad credit score is around 500. This leaves a fairly wide gap where your credit is poor to bad, meaning you will not qualify for a credit card.
Although credit is technically a form of borrowing money, this option is directed to personal loans. If you have bad credit, you will likely not qualify for personal loans from a bank. As a consequence, you will likely need to seek personal loans for purchases from friends or family.
Setting aside the question of the cost of such a loan and whether your friends or family will charge you interest, you must consider whether taking such a loan is advisable. Finances are one of the most common sources of family stress and borrowing money from a family member can cause tension in the family.
Store credit is a loan provided by the seller of the item. It is typically financed by a finance arm of the store or a financing company. Make no mistake – the sole purpose of store credit is to make money. Store credit is often associated with some of the highest levels of interest charged on credit products.
When you suffer from bad credit, your options for financing large purchases are limited. Fortunately, lease purchase programs can help.