If you've been turned down for a loan or credit card from a conventional bank or card issuer, or if your FICO® Score* puts you in the "poor" credit category or the low end of the "fair" category, it might be worth your while to consider borrowing from a credit union. Even with bad credit, getting a loan from a credit union may be possible.
What Is a Credit Union?
At first glance, a credit union looks a lot like its better-known cousin, the savings bank. Like banks, credit unions typically offer checking and savings accounts, debit and credit cards, and a variety of consumer loans, including auto loans and home mortgages. Most offer services through brick-and-mortar branch offices, ATMs websites and mobile apps.
There are quite a few differences between credit unions and banks, but the most relevant ones for borrowers with fair to poor credit are these:
- Credit unions are owned by their depositors, not by shareholders. Account holders are members of the credit union, and credit unions are focused on serving their membership.
- Credit unions are not-for-profit companies. Any profits they generate are invested back into the institution or distributed as dividends among the membership.
- Many credit unions have specialized membership requirements and services to match. While some credit unions accept anyone within their geographic area as members, others are limited to certain affinity groups, such as employees of specific companies, members of a labor union or the U.S. military services, members of a specific profession such as teachers and firefighters, and members of certain churches or community organizations.
Credit Union Advantages for Borrowers with Marginal Credit
Here's how those credit union traits translate to benefits for borrowers with fair to poor credit scores:
- Member ownership and focus on member needs mean credit unions may have greater flexibility than banks when deciding whether to issue credit. That could mean opportunities for loan applicants that banks would refuse to consider.
- Not-for-profit status means credit unions are exempt from paying taxes and, by definition, less concerned with making money from borrowers than commercial institutions would be. Therefore, they may be willing to accept riskier borrowers than banks would, and they can charge lower interest rates and fees than banks.
- Affinity-based memberships may mean the availability of loan products and borrowing terms tailored to members' careers and interests. For instance, the FedEx Employees Credit Association offers special vehicle loans (with an annual fee in addition to interest charges) to members recovering from bankruptcy or with otherwise severely compromised credit.
Applying for a Loan at a Credit Union
While credit union lending policies may differ from those of commercial banks, their loan application processes are typically much the same, except for the requirement that you become a member of the credit union in order to apply for a loan. That typically entails opening a checking or savings account and making a nominal deposit.
Loan applications typically can be submitted online, using a secure web account, or via hard copy. You'll need to submit your personal ID information, including Social Security number, so the credit union can check your credit score and credit report. You'll likely need to provide a pay stub or other proof of income as well, although that requirement may be waived if you have an established account with direct deposit.
Know Your Credit Score Before Applying for a Credit Union Loan
It's always a good idea to have a sense of your credit status before you apply for any loan, so before submitting an application to a credit union, consider checking your credit score and getting a copy of your credit report from one or all three of the national credit bureaus (Experian, Equifax and TransUnion). Reviewing your credit report and studying your score can help you know what to expect when you apply for the loan, such as what rates you might qualify for.
As we've discussed, even poor credit may not be a deal breaker at a credit union, where they'll consider your whole financial picture in addition to your credit score and report.
What if My Loan Application Is Denied?
Even with relatively generous lending standards, a credit union may still turn down your loan application. If that happens, you still have some other borrowing options, and the approach that might do you the best could be pursuing a debt consolidation loan—borrowing funds to pay off your existing debt. If you use it to pay down credit card accounts, a debt consolidation loan can have a double benefit—lowering your interest charges and reducing your credit usage in a way that can boost your credit scores.
When seeking a debt-consolidation loan, or just a lender other than a credit union, you could consider nontraditional peer-to-peer lenders such as Upstart or Lending Point, which ignore credit scores and instead consider factors such as work history, education, income, and financial history when making lending decisions. Note that these companies tend to charge considerably higher interest rates than a credit union would. And even though they don't typically consider credit scores, these companies do consider your credit history, so whatever issues caused you to have a low credit score could be concerning for them as well.
If these options don't pan out, your best bet may be to regroup. Consider focusing on improving your credit score, and plan on applying again in another year or so, once you've shored up your credit standing.
How to Build Your Credit
If your loan application is denied, or if you'd just like to boost your credit standing before applying for a loan, a credit union can still be a terrific resource. Many credit unions offer members educational tools and one-on-one counseling on how to build up credit. These can help you formulate a plan that can boost your credit score significantly within a year—and maybe even more quickly.
Many credit unions also offer special credit-builder loans (sometimes known as share-secured loans or certificate-secured loans) designed to help members improve their credit scores. These loans are typically for small amounts ($3,000 or less) and have short payback periods (one year or less).
The full amount of a credit-builder loan must be secured by collateral deposited at the credit union—funds in a savings account or certificate of deposit (CD). The credit union freezes your access to the collateral funds (but continues to pay interest on them) until you've paid off the loan. If you fail to make required payments, the credit union can seize the collateral to satisfy the loan.
The main benefit of a credit-builder loan is that the credit union reports your payments to the national credit bureaus, where they are recorded in your credit reports. As long as you make all your payments on time, the pattern of regular timely payments will tend to increase your credit score. Make sure the credit union reports payments to all three national credit bureaus before taking out a credit-builder loan.
You can build up your credit and improve your chances of approval the next time you apply for a loan by applying these tools, plus tried-and-true credit-building techniques such as:
- paying down credit cards with balances in excess of 30% of their borrowing limits;
- asking a friend or family member to co-sign for a loan; and
- becoming an authorized user on a friend or relative's credit card account.
Credit unions' low financing rates and fees and member-focused services make them an attractive option for anyone. Their flexible lending terms and tools for building credit make them an especially good option for borrowers with fair to poor credit.
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Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
*Credit score calculated based on FICO® Score 8 model. Your lender or insurer may use a different FICO® Score than FICO® Score 8, or another type of credit score altogether. Learn more.