Can I Get a Line of Credit With Poor Credit? Tips for Applying
It may be a little more challenging, but you can find a line of credit with a poor credit score.
Contributing Writer at Tally
August 5, 2022
Sometimes, financial needs are planned — like rent or groceries. But there are also plenty of unexpected expenses that crop up, like car repairs and medical bills. While paying cash is the ideal option to avoid racking up debt, that may not always be an option, and a line of credit may be a necessary alternative.
However, a poor credit score can stand in the way of any type of loan, including a line of credit. So you may ask yourself, "Can I get a line of credit with poor credit?"
Below, we'll explore whether or not lines of credit for bad credit exist and some alternative funding sources you may not have considered.
What is a line of credit?
A line of credit falls between a credit card and a personal loan. It's like a personal loan because it often has a lower interest rate than a credit card. However, it works like a credit card because the lender doesn't directly hand you the lump sum loan amount or place it in your checking account.
Instead, you have an approved credit limit and can borrow as often and as much as you need — as long as you have available credit. You only pay interest on the amount you use. Another similarity to credit cards is some lines of credit have annual fees.
If you’re approved after the application process, the lender will often give you a set period, called a draw period, when you're permitted to withdraw money from the line of credit. This draw period also often requires you to make interest-only monthly payments on the cash you use.
After the draw period closes, you'll enter the repayment period, when the lender expects you to pay off the outstanding balance. During the repayment period, your minimum payments will include principal and interest.
A line of credit is great for home improvement or repairs, automotive restoration or repairs, liquid cash flow for a business, debt consolidation and other expenses that have varying costs.
There are three main types of lines of credit loan options:
Home equity line of credit (HELOC): A HELOC is restricted to homeowners only and is a line of credit based on the equity in your home — the home’s market value minus the mortgage amount on the home. Your home is the collateral for this secured line of credit, meaning the lender can foreclose on your home if you default.
Business line of credit: A business line of credit is similar to a HELOC, but the collateral is a business asset instead of a home. This could include your business’s building, equipment, vehicles and more.
Personal line of credit: A personal line of credit works like a HELOC, but they're usually unsecured lines of credit, meaning no collateral is tied to it. The lender offers the borrower the line of credit based on their credit score and credit history. These unsecured lines of credit will tend to have a higher annual percentage rate (APR) due to the risk associated with them being unsecured.
Can I get a line of credit with poor credit?
Most lenders offering a line of credit require a favorable credit report and a good credit score for approval. If your FICO® Score is 670 or above, you likely won’t have an issue getting through the underwriting process and being approved.
However, once your credit score dips below 670, most lenders' standards place you in the bad credit category. This can make getting a line of credit more difficult, but it's still possible.
Here are a few tactics for getting a line of credit with a bad credit score.
Get a Tally line of credit
Tally's†line of credit generally requires a 660 FICO credit score for approval, which is low enough to cover a portion of people with poor credit. The Tally line of credit offers an interest rate that's generally lower than most credit cards, allowing you to pay off high-interest debts quicker and save money along the way.
Plus, Tally manages all your monthly minimum credit card payments — even those you didn’t use your line of credit to pay off. So, you make only one monthly payment, and Tally handles the rest.
Finally, checking if you qualify for a Tally line of credit is risk-free and has no impact on your credit score.
Get a co-signer
A co-signer is someone who signs for the loan along with you. If you lack the minimum credit score needed to get a line of credit, a co-signer with a good credit score may be enough to get the lender to approve you.
Remember, as a co-signer, this person becomes equally responsible for the debt you’re taking on. So, if you have a late payment and receive a negative mark on your credit score, your co-signer may get the same negative mark.
Increase the collateral
Sometimes a lender just needs reassurance that if you default on the line of credit, the lender will have the means to recoup as much of the amount you've borrowed as possible. You can offer this assurance by providing more collateral, be it additional business assets, a paid-off vehicle or another asset you own.
Open a high-value bank account
If you're dealing with a traditional bank or credit union, they will sometimes overlook a low credit score on a line of credit application if you open a certificate of deposit (CD) account and place a large sum in it. This shows the bank that you have liquid assets that can act as collateral if you default on the loan.
The downside to a CD is they often require you to leave the money untouched in the account for a fixed time — typically six months, one year or five years.
Are there specialists who deal in lines of credit for bad credit?
You could turn to bad-credit specialists if you've exhausted all your options to get approved for a line of credit through a traditional lender. These are typically online lenders who know how to handle tough credit cases and get them through the qualifying process.
So, why not go this route in the first place? Because there can be downsides to using these companies.
Unfavorable loan terms
These lenders deal in bad credit, so they use higher interest rates to help offset their risk. There's a good chance you'll get a much higher interest rate from a bad credit specialist than a traditional lender. Also, their loan terms may not be favorable, including the draw period length and the repayment terms.
These lenders also may charge significantly higher upfront fees, including origination, processing, application and other assorted lender fees. There could also be monthly maintenance fees or annual fees throughout the life of the line of credit.
Some bad-credit line-of-credit specialists aren't lenders. Instead, they're brokerages who shop your credit and loan needs to lenders to get you approved. When they finally get you approved, the brokerage may offer you different terms on the line of credit than the lender has offered to them.
The brokerage may get one interest rate from the lender, but it can add points to the interest rate and earn a commission on the added points. For example, the lender may approve your loan at 15% interest, but the brokerage could sell the loan to you at 17%, and the lender will pay a commission to the brokerage on the extra two percentage points.
The other issue with brokerages is they may submit your credit profile to many lenders, and each lender may do a credit check of their own. While a few hard credit inquiries are OK, too many can impact your credit score.
Are there alternative loan options to lines of credit for bad credit?
Don't give up if you're struggling to find a good line of credit. There are several alternatives to consider, but some have additional risks to keep in mind.
A line of credit is a revolving debt, meaning you can use it multiple times, so lenders may have stricter creditworthiness and eligibility requirements. A traditional installment loan — a loan with a fixed term and monthly payment — may be a good alternative in this case.
There are many types of loans, including a home equity loan, unsecured personal loan, secured loan and more. There are even bad-credit loans designed for this situation.
Remember, if you have bad credit, there could be additional fees to consider, such as higher-than-normal origination fees and higher interest rates.
While borrowing from a 401(k) will impact your retirement savings because you can no longer earn interest on the borrowed amount, it can help you in a pinch.
With a 401(k) loan, the financial institution managing your 401(k) will issue you a lump-sum payment for the loan amount. You can use this amount as you see fit.
You can usually borrow up to 50% of your vested 401(k) balance with a maximum loan amount of $50,000, and you can take up to five years to repay the loan. The significant benefit is the interest rate attached to this loan gets paid into your 401(k), not the financial institution.
The downside is you're missing out on valuable compounding interest by withdrawing this money, potentially reducing your funds in retirement. Also, if you leave your job, the loan balance could be due immediately.
Are there line of credit alternatives I should avoid?
Some line of credit alternatives may seem like good ideas when you’re in an emergency, but you should avoid these options.
Friends and family
Borrowing from friends and family isn't a great habit because it can be quite risky. The friend or family member likely won’t have the means to report missed payments to the credit bureaus like a traditional lender. However, missed payments and defaulted loans can put friends and family in tough financial situations, potentially causing irreparable damage to the relationship.
Payday loans have a horrific reputation due to their history of issuing predatory loans to low-income individuals. Predatory tactics include ridiculously high interest rates and virtually impossible repayment terms that often trap borrowers in an endless loop of payday loan debt. In this case, you end up taking out payday loans just to pay off your previous payday loan — a losing situation all the way around.
Some borrowers needing larger sums of cash view title loans as an option. A title loan requires you to have a paid-off vehicle registered in your name. The title lender lends you money — often at a high interest rate — and places a lien on your vehicle’s title for the loan amount.
If you default on the loan, the lender will repossess your vehicle and sell it to recoup the losses on the loan.
These loan companies have the same dark history as payday loans due to their high interest loans and predatory lending practices. Plus, a title loan could end up putting you into the same payday loan loop mentioned earlier, as you might use a payday loan to cover the title loan payment and avoid losing your vehicle.
What are my alternatives to borrowing?
The soundest personal finance option when you’re in a monetary pinch and have bad credit is to avoid borrowing altogether since you’ll likely be stuck with a high interest rate and unfavorable loan terms with bad credit. Try these alternatives to borrowing to attempt to raise the cash needed to handle the situation.
Pick up a side gig
We’re in the age of the gig economy, and new side gigs seem to crop up daily. Whether it’s food delivery, grocery shopping, furniture assembly, lawn maintenance or freelancing, these side gigs are generally flexible and relatively easy to secure with the right skills.
You can pick up a side gig and leverage its flexibility to earn cash outside your regular working hours. Once you’ve handled the financial hardship, you can drop the gig and get back to normal or continue and use the extra money to build an emergency fund to cover future financial needs.
Sell unneeded items online
Selling items of value you can live without is now easier than ever, thanks to sites like eBay, Craigslist and Facebook Marketplace. Scour your home and find all the items of value you rarely use and can live without, then list them for sale. Use this extra cash to help deal with the hardship you’re experiencing.
If you’re not squeamish about needles, plasma donation can help you raise funds needed to handle a small financial emergency. You can earn $20 to $50 per plasma donation, and some donation centers will allow you to donate up to twice weekly. If you donate twice per week, you could earn $160 to $400 monthly.
Yes, borrowing is possible with poor credit
If you're asking, "Can I get a line of credit with a poor credit score?" you can rest assured there are options for you, including:
Getting a co-signer.
Increasing the collateral on the line of credit.
Opening a high-value savings account with the lender.
If none of those work for you, there are plenty of alternatives to lines of credit, including installment loans and 401(k) loans. However, your best option is not to borrow cash and instead increase your cash flow to offset the financial hardship you’re experiencing. You can pick up a side gig, sell unnecessary items around your home or even donate plasma to earn this extra cash.
No matter how low your credit score is, there are options to get the funds you need.
If you’re looking to free yourself from credit card debt, consider the Tally†credit card payoff app. The app helps you manage your credit card payments and offers a lower-interest personal line of credit, allowing you to efficiently pay off higher-interest credit cards.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 to $300.