If you’ve ever grown up inside of the US or UK, you will undoubtedly be familiar with adults fretting over their credit scores. Indeed, one of the central tenets to personal finance success is to keep your credit score under control.
Why is your credit score so important?
One of the main reasons is that it gives the lender an insight into the borrower’s ability to repay a loan. This can have a big impact on how much you can borrow, at what interest rate, or if you can even borrow at all!
While seemingly innocuous, there are very many factors that go into calculating your credit score. Some of the factors considered are things such as: different accounts owned by the borrower, history of payment, duration of credits and current status of credits.
In fact, you can check out the full list of credit score factors here.
What is a bad score?
There is some dispute as to the exact limits of what constitutes a “good” credit score vs a “not-so-good” one. However, most sources agree to the following:
- Credit score of 750+ : Excellent
- Credit score of 700-749 : Good
- Credit score of 650-699 : Fair
- Credit score of 600-649 : Poor
- Credit score below 600 : Bad
Based on the bureau that is providing you with credit scores, your credit score will usually range from 300 (lowest rating with highest risk) to a maximum of about 850 (highest rating with lowest risk).
As we mentioned earlier, your credit score can have a massive impact on your life. Some of the most common outcomes of low or bad credit score are:
- Difficulty in getting loans
- Higher interest rates along with stricter rules on approval
- Rise in insurance premiums
You can read about more negative effects of bad credit scores here.
All these negative effects are undesirable, but the biggest problem with having a bad credit score comes to light during a financial emergency.
Bad situations and a financial crunch can surprise us at any time, regardless of our credit score. Have a good credit score, and you may be well equipped to deal with the emergency – for example, you could easily get a personal loan from the bank to fork out whatever outlays you need.
Have a bad credit score though, and you could be caught in a serious financial pinch!
Much like a vehicle with its wheels lodged deep in muddy terrain, you would need some external help (a winch, so to speak) in order to get out of the situation.
Financial crunches are definitely not the end of the world. In fact, there are a few options and tools at your disposal in such times. Some of them are:
- Personal Loans
- Payday Loans
- Credit Cards
- Friends and Family
These are the most common options that come to mind in a financial crunch.
However, for the less creditworthy of us, only two of these options are disregard your credit score.
For personal loans, banks would look into the credit score and history. A bad score can literally mean bad news.
Though credit cards are a good option, they can become pretty expensive over a period of time if you consider their effective interest rate.
Borrowing money from friends and family is one of the safest options, but they are subject to availability of funds. If your family and friends don’t have cash just lying around, then you’re out of luck!
Payday loans on the other hand, which are sometimes referred to as flexible short term loans, can be considered the best option in a financial crunch. This option is especially attractive if you have a bad credit score.
The popularity of flexible short term loans has grown for quite some time and for some very valid reasons. These loans are designed for very short time frames and thus the processing is pretty fast as well. These loans are designed to be repaid by your next payday and some lenders even allow for renewing of the loans. However, we’d only recommend rolling over your loan if you can foresee that you will be paying it back in the near future; or else your loan will become unwieldly.
One of the reasons behind the immense popularity of these flexible short term loans is that one can extend the term from their next payroll to about 45 days. Payday loans usually don’t look into the credit score much, which comes spectacularly in your favor if your credit score is bad.
As they are smaller loans for personal usage and with much shorter repayment schedules, credit scores are something that lenders are not worried about much.
There are basic requirements though, such as having to provide your working details, for the lender to get assurance on repayment.
Payday loans are incredibly fast, both in terms of application and receiving the money. As they are for shorter durations, the requirements from a borrower’s perspective are also pretty low. I have personally come across several lenders who even increase your borrowing limit when you repay your loans on time.
The flexible short term loans industry has evolved a lot over the last decade. This means lot more established players are entering this sector. Thus one can expect better customer service and more courteous staff while dealing with payday loans.
As we alluded to earlier, one of the biggest advantages is enjoyed by people with poor credit scores. This is because payday lenders often do not take into account your credit score when extending you a loan.
There are very rare instances where we find something to be perfect without any quirks or qualms at all. Payday loans do not escape this convention unfortunately.
Though they offer lots of advantages, payday loans that are provided without credit checks can have some negative impacts also. For example, some lenders compensate for the lack of credit checks by offering loans at a higher rate than other loan options.
Payday loans can be a great option at times of financial emergencies. They become important more so, when no other option is at hand.
One needs to keep in mind however, that short term loans and not permanent solutions to your financial problems. You should use these options as a stopgap; otherwise you might end up in a vicious cycle of loan after loan.
The good news is that there are lots of vendors and lenders available for payday loans. Despite this, you still need to be cautious while selecting a lender and be aware of the different terms and clauses attached to your loan. Shopping around with different lenders is worth your time if you end up with a loan with lower interest rates.