How to get a line of credit with bad credit

^{Links to external websites are not managed by Varo Bank, N.A. Member FDIC. All Varo products and services mentioned below are contingent on opening a Varo Bank Account. Qualifications may apply.}

If you're struggling with poor credit, you're not alone. In fact, 37% of Americans have a credit score below 700, which leaves room for improvement. When you have bad credit health, especially those with a credit score under 600, it can be difficult to qualify for a personal line of credit. 

The good news is that there's still hope. Personal lines of credit are a type of financing that allows you to borrow money as needed and pay interest only on the amount you use, making this option more flexible than a traditional loan.

In this article, we'll dive into how you can get a personal line of credit even with bad credit. We'll cover what a line of credit is, challenges you may face, tips for applying, and alternative options to consider. Let's get started!

What is a Line of Credit?

So, what is a line of credit? A line of credit is a type of financing that allows you to borrow money up to a predetermined limit, similar to a credit card. However, unlike a credit card, you can access the funds as cash and use them for almost any purpose, such as making home improvements, kickstarting a business idea, or to supplement your emergency fund.

Think of a personal line of credit as a financial safety net. It's there when you need it, but you don't have to use it if you don't want to. One of the biggest advantages of a line of credit is flexibility. You can borrow as much or as little as you need, up to your borrowing limit, and you only pay interest on the amount you use.

Read more: The advantages and disadvantages of credit lines

Secured vs Unsecured Credit Lines

There are two main types of lines of credit: secured and unsecured. 

A secured line of credit is backed by collateral, such as a savings account or a vehicle. This means that if you default on your payments, the lender can seize the collateral to recoup their losses. 

An unsecured line of credit, like an unsecured personal loan, doesn't require any collateral. This lack of collateral means the lender is taking on more risk, which can translate to higher interest rates or shorter repayment terms, with the benefit of not putting your assets on the line.

Challenges of Getting a Line of Credit with Bad Credit

If you have bad credit, there are challenges you may face when trying to get approved for a personal line of credit or a personal loan. Lenders use your credit history as a way to gauge your creditworthiness and determine the risk of lending to you. Traditional lenders, such as banks and credit unions, often have strict credit requirements, and a low credit score can be a red flag to lenders by indicating a potential history of missed payments, high debt levels, or other financial difficulties. This can be frustrating and disappointing when you need financial assistance.

Even if you are approved for a line of credit with bad credit, you may face less favorable terms and conditions. These terms can include:

• Higher interest rates: Lenders may charge you a higher interest rate to compensate for the perceived risk of lending to you. This means you'll pay more in interest over the life of the loan.

• Lower borrowing limits: You may be approved for a lower credit limit than someone with good credit, which can limit your financial flexibility.

• Shorter repayment terms: Lenders may require you to repay the loan over a shorter period, which can result in higher monthly payments.

It's important to remember that having bad credit doesn't mean you're out of options. Some lenders specialize in working with borrowers who have less-than-perfect credit, and there are steps you can take to improve your chances of approval (we'll cover this later in the article).

Read more: How Lines of Credit Can Affect Your Credit

Tips for Applying for a Line of Credit for Bad Credit

If you're ready to apply for a line of credit but are worried about your bad credit, don't fret. There are steps you can take to increase your chances of approval and secure the funding you need.

• Research lenders that specialize in bad credit services: Some lenders focus specifically on working with borrowers with less-than-perfect credit and therefore, may have more flexible requirements.

• Check your credit report for errors: Before applying, review your credit report for any inaccuracies or errors that could drag down your score. If you find any, dispute the errors with credit bureaus to have them removed.

• Be honest about your financial situation: When applying for a line of credit, be upfront about your income, monthly payments, employment, and existing debts. Lenders appreciate transparency, and honesty can help everyone avoid surprises down the road.

• Consider applying with a co-signer or guarantor: If you have a trusted friend or family member with good credit, consider asking them to co-sign your application. This means they'll be equally responsible for repaying the loan, which can increase your chances of approval and potentially secure you better terms.

• Be prepared for higher rates and fees: Lenders may charge higher interest rates and fees for borrowers with bad credit. Be sure to carefully review the terms of any offer before accepting it to ensure you understand the costs involved.

Steps to Improve Your Credit Before Applying

While options are available for getting a loan with bad credit, taking steps to rebuild your credit before applying can increase your chances of approval and help you secure better terms. While your unique situation and actions will determine how long it will take for your score to improve, Equifax says some scores can change as quickly as within 30 to 45 days. 

Here's what you can do to increase your chances of approval for loans with bad credit:

• Pay your bills on time: Payment history is often the most significant factor in your credit score. Consistently making on-time payments can go a long way toward improving your credit.

• Reduce your credit utilization: Your credit utilization ratio is the amount of credit you use compared to your credit limits. Aim to keep this ratio below 30% (or even better, below 10%) by paying down existing debts and avoiding maxing out your credit cards.

• Avoid applying for new credit accounts: Each time you apply for credit, a hard inquiry is made on your credit report, which can temporarily lower your score. Try to limit new credit applications in the months leading up to applying for a line of credit.

• Become an authorized user: If you have a trusted friend or family member with good credit, consider asking them to add you as an authorized user on their credit card account. This can help you build credit without the risk of taking on new debt yourself. Note that not all financial institutions will report authorized users to credit bureaus. You may want to verify prior to being added.

• Seek credit counseling: If you're struggling to manage your debts and improve your credit independently, consider working with a reputable credit counseling agency. They can provide personalized advice and help you create a plan to get your credit back on track.

Financial Success Comes From Building Healthy Habits

Getting a personal line of credit for bad credit can be challenging, but it's not impossible. By understanding your options, improving your credit, and working with the right lender, you can secure the funding you need to achieve your financial goals.

Remember, a line of credit is just one tool in your toolbox. The key to long-term financial success is developing healthy money management habits and making informed decisions about borrowing and spending. With the right knowledge and support, you can overcome bad credit challenges and build a brighter financial future.

One personal line of credit that is worth considering is Varo Line of Credit¹. This credit line offering allows you to borrow between $600 to $2,000 with fixed monthly payments that span over 3 to 12 months, depending on the amount borrowed. There are also no recurring interest charges, late fees, or prepayment penalties. Best of all, your credit limit can grow with your banking activity, meaning that you don’t need perfect credit to get started with lower borrowing limits.

Get started with Varo today or click to learn more about Varo Line of Credit!

^{1 The Varo Line of Credit is designed to help customers with unforeseen expenses with monthly payments, no late fee, no prepayment penalties, and no interest. To be eligible, your accounts must maintain a positive balance. Minimum monthly deposits, average daily balances, and other eligibility requirements apply. Once qualified for Varo Line of Credit, you will be assigned a credit limit from $600 to $2,000. A one-time fee is added to your borrowed amount, early repayment of your advance does not reduce the one-time fee. Your credit limit may fluctuate from one advance to the next based upon a variety of factors. You may only take one Varo Line of Credit out at a time. Your eligibility information and/or credit limit is always available to you in the home screen of your Varo app. Checking offer eligibility will not impact your credit score. If you are eligible and choose to apply for an offer, we will pull your credit and your credit score may be impacted.}