Sometimes, financial needs are planned, like a home improvement project. But they can also crop up unexpectedly, like car repairs. Regardless of whether it was planned or unexpected, a line of credit may be a great way to get the cash to satisfy your financial need without dipping into your savings.
The problem is, a poor credit score usually stands in the way of any type of loan. So you may be asking yourself, “Can I get a line of credit with poor credit?”
Below, we’ll explore whether or not there are lines of credit available for people with a poor credit score. Plus, we’ll cover some alternative funding sources you may not have considered.
A line of credit falls between a credit card and a personal loan. It’s like a personal loan in that it usually has a much lower interest rate than a credit card. However, it’s more like a credit card in that the lender doesn’t directly hand you the lump sum loan amount. Instead, you have an approved credit limit and can use as much or as little of that limit as you need. You only pay interest on the amount you use.
Lenders 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, which is when the lender expects you to pay off the full principal and remaining interest.
A line of credit is great for home improvement or repairs, automotive restoration or repairs, liquid capital for a business, debt consolidation and other expenses that have varying costs.
There are three main types of lines of credit:
- Home equity line of credit (HELOC): A HELOC 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 the line of credit, meaning the lender can foreclose on your home if you default.
- Business line of credit: A business line of credit is the same as 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 or business line of credit, but they’re usually unsecured, meaning there is no collateral associated with the line of credit. The lender offers the borrower the line of credit based on their credit score and credit history.
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’ll likely have no issue getting approved.
However, once your credit dips below 670, you fall into the bad credit bucket by most lenders‘ standards. This can make it harder to get a line of credit, but it’s still possible.
Here are a few tactics for getting a line of credit with a bad credit score.
Tally’s line of credit1 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 payment per month, 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.
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.
Keep in mind, though, 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.
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.
If you’re dealing with a traditional bank or credit union, they will sometimes overlook a low credit score on a line of credit 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, but it can also 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.
If you’ve exhausted all your options to get approved for a line of credit through a traditional lender, you could turn to bad-credit specialists. 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 some serious downsides to using these companies.
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, including the draw period length and the repayment terms, may not be favorable.
These lenders also may charge significantly higher upfront fees, including origination fees, processing fees, application fees and other assorted lender fees. There could also be monthly maintenance 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 the brokerage.
The brokerage may get one interest rate from the lender, but it can add points to the interest rate and earn 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 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 have a big impact on your credit score.
If you’re struggling to find a good line of credit, don’t give up yet. There are several alternatives to consider first.
Because a line of credit is revolving debt, meaning you can use it multiple times, lenders may have stricter creditworthiness requirements to get approved. 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 to pick from, including a home equity loan, unsecured personal loan, secured loan and more. There are even bad credit loans designed for your situation.
While it’s not ideal to borrow from a 401(k), 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 in 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. What’s more: While there is generally an interest rate attached to this loan, you’re paying that interest to yourself, not the bank.
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.
While borrowing from friends and family isn’t a great habit to start, they may be able to help when you’re in a bind. Ask around to see who may have the available cash to lend to you and draw up formal loan terms — interest and all — to sign in front of a notary.
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 payday loan loop.
When used correctly, though, these unsecured loans can help you when you have a short-term financial emergency. Just make sure you fully understand the terms and can afford to repay the loan in full when it comes due.
If you need a larger loan amount, a title loan may be an option. To get a title loan, you must have a vehicle that’s paid off and registered in your name. The title lender lends you money — often at a high interest rate — and places a lien on your 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, but you can mitigate your risk by ensuring you understand the loan terms fully and can afford to make all the monthly loan payments on time.
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. You can opt for a Tally line of credit with a minimum credit score of 660 and be on your way to becoming free of credit card debt. If your credit is below 660, there are other ways to secure a line of credit, 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, payday loans, title loans, personal loans from friends and family and even 401(k) loans.
No matter how low your credit score is, there are options to get the funds you need.
1To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% – 29.99% per year. The APR will vary with the market based on the Prime Rate. Tally Technologies, Inc. NMLS # 1492782 (nmlsconsumeraccess.org). Loans made or arranged pursuant to a California Finance Lenders Law License or other laws in your state.