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Having access to credit can be a necessity for many who experience financial hardship. But during an economic downturn, it can be challenging to get as lenders tighten up their credit standards.
If you're struggling financially and need credit to make ends meet, here are ways to get the financing you need.
What Happens to Credit in a Tight Market
Lending can be a risky business, especially if economic conditions impact borrowers' ability to make their monthly payments. During an economic downturn such as the one caused by the COVID-19 (coronavirus) pandemic, lenders may be more willing to work with existing customers who are struggling to make their payments, by deferring payments, for example. But to make up for that, they also may tighten up their underwriting standards for new applicants.
With mortgage lenders, for instance, this may mean you need to have a higher credit score and make a bigger down payment than usual to get approved for a loan. Other loan types may have similar requirements, though with unsecured options like personal loans and credit cards, the emphasis will be on your credit score and history instead of a down payment.
The people who may be hit the hardest by these changes include business owners and people with poor credit, who may experience more financial challenges when times are tough than consumers who have excellent credit.
Fortunately, this doesn't mean that all bets are off if you need credit. You just may need to approach the situation differently and take some more time to research your options.
What to Do if You Need Credit Now
While many major lenders are tightening their credit criteria, you still have some options to gain access to credit. Here are some steps you can take.
Check Your Credit Score
Regardless of economic conditions, your credit situation will have a big impact on your approval odds. Check your credit score to get an idea of where your credit stands. According to FICO, it will fall into one of five ranges:
- Exceptional: 800 to 850
- Very good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Very poor: 300 to 579
In general, people with good to exceptional credit will have the best chances of getting approved for a loan.
Research Your Options
While many lenders make some changes to how they consider new applicants during tough economic times, most aren't leaving borrowers out in the cold completely.
Take some time to search for lenders that offer loans based on your credit score and compare interest rates and other terms with each. Experian CreditMatch™ can help with this part of the process by providing you with quotes from multiple lenders based on your credit score, which you can compare all in one place.
Get a Cosigner
If your credit score is considered fair or very poor according to FICO, you may have a hard time getting approved for a loan with a decent interest rate. The alternatives, which include payday loans, auto title loans and short-term personal loans, often charge sky-high interest rates that will make it very difficult to afford repayment and are not recommended.
However, if you have a loved one who has good credit or better, and they're willing to apply with you, it can help you not only get approved but also score a low interest rate. Just keep in mind that you both will be responsible for loan payments, and any late payments will hurt the credit scores of both people who've signed. So make sure if you ask someone close to you to cosign a loan, you make all the payments on time to keep your credit—and your relationship—strong.
Work to Improve Your Credit Score
If you need money now, you may not have time to take steps to build your credit history. However, if you think you may need access to credit in the near future, it's a good idea to work to improve your score so you'll have a better chance of getting approved the next time you need a loan.
Here are a few ways you can potentially build credit quickly:
- Get added as an authorized user. If you have a family member with great credit and credit card with a positive history, getting added as an authorized user may add that account history to your credit report. Not all lenders report authorized user accounts, so check with the credit card company first. Depending on how long the account has been open, it could potentially give your credit score a solid bump.
- Check your credit report to make sure information is accurate and up to date. Credit reports are accurate in most cases. But if you find something you think is inaccurate on yours, you can dispute it with the credit bureaus. You'll need to dispute the item at each of the credit agencies where the potentially incorrect information appears. If the item in question is impacting you negatively, having it removed or corrected could positively impact your credit score. You can get a free copy of your credit report from each of the three national credit reporting agencies (Experian, TransUnion and Equifax) through AnnualCreditReport.com. While you are normally allowed one free copy per year from each of the credit agencies, through April 2022, you can get a free copy once a week. You can also get a free Experian credit report anytime.
- Reduce your credit utilization. Your credit utilization ratio represents the percentage of your available credit on credit card accounts that you're using at a given time. The higher your balances relative to their credit limits, the higher your utilization rate will be. If at all possible, work to pay down your credit card balances to reduce that rate to 30% or lower. The lower it is, the better.
- Get caught up on past-due payments. The longer an account is delinquent, the more it can hurt your credit score. So while getting current on a past-due account may not necessarily increase your credit score immediately, it can prevent further damage and make it easier to build your credit going forward.
- Use utility payments to boost your score. Historically, you could not get credit for on-time payments on utility and phone accounts. But with Experian Boost®ø, they now can. To use it, you'll connect your bank account and choose which payments you want to be added to your credit file. Once your new payment information is added, your Experian FICO® Score☉ could increase immediately.
What to Do if You Can't Find the Credit You Need
If you've taken the right steps to get access to credit and haven't had any success, it may be helpful to turn your focus to your current debt obligations and seek relief there. Here are some actions you can take.
Contact Your Lenders
Even when times are tough, lenders are often willing to work with borrowers to provide relief. In the lender's eyes, allowing you to defer some payments for a short period can pay off in the long run, especially if the alternative is you defaulting on the debt. Some lenders may also be willing to reduce your interest rate, if only temporarily, to make it easier to afford your monthly payments.
If you have federal student loans, you may be able to get on an income-driven repayment plan, which will reduce your monthly payment to 10% to 20% of your discretionary income—plus, federal loans come with some generous forbearance options. Due to the COVID-19 pandemic, student loan payments have been suspended without repercussions through September 2021, which could provide more cash for necessary expenses.
Make sure to contact your lenders directly to ask about assistance they can offer. While there may be programs available to help, you need to be proactive and reach out to them.
Check for Government Assistance
Government agencies provide a variety of social services to people who experience financial hardship. Depending on the situation, you may be able to get access to unemployment benefits, rent vouchers, SNAP payments and more.
Consult With a Credit Counselor
If your financial situation is dire, consider working with a credit counselor to see what your options are.
Credit counseling agencies typically provide free financial advice, but they also offer debt management plans, which can help you with your debt. These programs, which typically last three to five years, effectively consolidate your debt into one monthly payment, which you make to the credit counseling agency. These agencies may also be able to negotiate lower monthly payments or interest rates with your creditors, which can provide some much-needed relief.
Just keep in mind that your lenders could add a note to your credit file indicating you are paying through a debt management plan, which could be viewed negatively by other creditors. Also, if the credit counselor negotiates an amount that is less than what you owe on an account, it could be reported as "settled," which could have a negative impact on your scores.
If a debt management plan isn't right for you, a credit counselor still may help you find the best path forward. To find a reputable credit counselor, look for a nonprofit agency affiliated with the National Foundation for Credit Counseling.
Addressing Your Immediate Needs Could Prevent Future Problems
If you find yourself struggling during an economic downturn, you may be wondering if there's a light at the end of the tunnel. While it's impossible to know the future, taking these and other steps to address your immediate financial needs can keep your situation from getting worse, and ultimately make it easier to recover fully.