3 min read

can i get a line of credit with bad credit

Written By

Clay Shiffman

Whether you need a personal loan or a line of credit, many financial institutions and private lenders review your credit score. Maintaining a pristine credit score is often touted as a key to unlocking various financial opportunities, and navigating with a low credit score can make it harder to secure the financing required to reach many of your goals and milestones.

Whether unexpected challenges or poor money management skills led to low credit scores, it doesn't have to be the end of the world. While it may take more work for you to break bad habits or get your financial obligations and debts situated, getting a line of credit with bad credit is possible.

In this comprehensive exploration, we delve into the nuances of securing a line of credit when faced with a less-than-stellar credit history.

What is a line of credit?

Before exploring how you can obtain a line of credit with a low credit score, it's imperative to understand the fundamentals of lines of credit. Unlike traditional loans with a fixed amount, a line of credit is a revolving credit of a predetermined amount. You can withdraw funds up to the limit, pay off your debt, and borrow money as needed. You can use your line of credit for multiple purposes, such as home improvements, emergency expenses, or debt consolidation. You pay interest on the amount borrowed.

The role of credit scores

Credit scores serve as a pivotal factor in the lending process. Your credit history gives credit unions, banks, and other financial institutions insight into your creditworthiness. Credit bureaus take information from your credit report, like payment history, credit length, credit mix, credit utilization ratio, and new credit accounts, and give you a three-digit score ranging from 300 to 850. 300 is the lowest score, and 850 is the highest credit score. High credit scores are often associated with favorable lending terms and lower interest rates, while lower credit scores may result in challenges while securing credit.

How are credit scores calculated?

Credit bureaus give you a three-digit score ranging from 300 to 850 based on the information from your credit report. Here's the breakdown of how credit scores are calculated:

  • Payment history: 35%

  • Credit utilization ratio: 30%

  • Length of credit: 15%

  • Credit mix: 10%

  • Credit inquiries: 10%

What is a bad credit score?

A bad credit score typically falls below 580 on the FICO credit score scale or below 600 on the VantageScore scale. A poor credit score can indicate a high risk for lenders, suggesting past financial difficulties like missed or late payments, defaults, or bankruptcy. You may have difficulties securing credit with a poor credit score, like credit cards, personal loans, and lines of credit. You may also have challenges getting favourable interest rates and payment plans.

Some landlords, insurers, and employers review your credit score as part of a background check. Bad credit may impact housing options, insurance premiums, or job prospects.

What is a good credit score?

On the contrary, a good credit score typically falls within the range of 670 to 739, a very good credit score ranges from 740 to 799, and anything above is an excellent score. The average credit score in Canada is 680. Your credit score can vary slightly depending on the credit scoring model.

Lenders may have individual criteria for what they consider a good credit score and offer products to borrowers accordingly. Having a good credit score typically makes it easier to qualify for loans like credit cards, personal loans, and lines of credit. It also makes it easier for borrowers to secure better interest rates and repayment terms. It's always a good idea to regularly monitor your credit score, as building credit and strong credit management skills is ongoing.

Is it possible to get a loan with bad credit?

The short answer is yes. While more challenging, there is help available to help you secure a line of credit even with a lower credit score. Some financial institutions specialize in providing bad credit loans or private lenders you can reach out to for a line of credit.

Lenders perceive individuals with low credit scores as higher-risk borrowers. You may have more stringent eligibility criteria, higher interest rates, or outright rejections for your credit applications. Additionally, traditional financial institutions and lenders may prioritize credit scores when evaluating loan applications, so a lower credit score can have a significant impact on whether you get approved for a line of credit.

Securing a loan with bad credit

Whether you're looking for a line of credit or getting a personal loan with bad credit, there are ways of securing one. Finding the right people to help you secure a loan with a less-than-stellar credit score can give you the funding opportunities required to reach many of your goals and milestones. Here are some options to explore.

Credit unions

Credit unions are financial cooperatives, often more community-oriented than traditional financial institutions. They may be more willing to work with individuals with bad credit because they consider factors beyond credit scores. For example, credit unions may look at the borrower's ability to repay the line of credit or their relationship with the borrower.

Online lenders

Online lenders have become increasingly popular due to their convenience and accessibility. Some online lenders specialize in providing bad credit loans to individuals with lower credit scores. While these lenders typically have faster approval processes and more lenient credit requirements, borrowers should review the terms and conditions as interest rates and fees can be higher than traditional loans.

Peer-to-peer lending

Peer-to-peer lending platforms connect borrowers directly with individual investors willing to fund loans and lines of credit. These platforms have more relaxed credit criteria and may be more willing to work with people with bad credit reports. However, interest rates may be high, so borrowers should thoroughly research the platform and investor profiles before accepting a line of credit offer.

Co-signer

A co-signer is someone with good credit who agrees to take responsibility for the debt if the primary borrower fails to repay it. Having a co-signer can improve the likelihood of loan approval and may result in better interest rates or loan terms. The co-signer is equally responsible for the loan, and their credit score can be harmed by missed payments. The borrower and co-signer must understand their responsibilities to manage the line of credit responsibly to avoid damaging the relationship and their credit.

Advantages and disadvantages of loans for poor credit

Loans for individuals with poor credit can be a lifeline or a burden. Here are some advantages and disadvantages to consider.

Advantages of loans for poor credit

  • Access to funds: Individuals with poor credit may have limited options for obtaining funds. Loans for poor credit are specially designed to provide easy access to cash, allowing people to address immediate financial concerns and help them stay afloat.

  • Improving credit: Poor credit can make it more difficult to secure loans, and difficulties securing loans make it harder to rebuild your credit. Responsible repayment of a loan for poor credit can help rebuild your credit history if you show financial responsibility with timely payments and low credit utilization rates.

  • Flexible terms: Some loans for poor credit offer flexible repayment terms than traditional loans. Borrowers may have longer repayment periods or small installment amounts, making it more manageable to repay debt.

  • Opportunity for financial stability: By using a loan to address pressing financial issues, individuals can regain stability and avoid further financial setbacks, such as defaulting on payments and facing collecting actions or a cycle of debt.

Disadvantages of loans for poor credit

  • Higher interest rates: Many loans for poor credit come with higher interest rates than loans for good credit. It costs more money for borrowers to secure financing, and they pay more over the life of the loan.

  • Limited options: Borrowers have fewer options for lenders and loan products. You may have to accept less-than-ideal interest rates or repayment terms until you can improve your situation and credit score.

  • Risk of debt trap: Taking on additional debt when you already have existing struggles with credit can add fuel to the fire. If you already have missed or late payments and outstanding balances, high-interest rates and more credit accounts can lead to a cycle of debt, making it harder to gain financial freedom.

  • Impact on future financial opportunities: Defaulting on a loan for poor credit can have long-term consequences on your credit report and score. If your credit score is already low, the last thing you want is for it to drop further, as it can significantly impact your ability to secure mortgages, car loans, and other credit accounts later.

Are there banks that will loan with bad credit?

There are banks and financial institutions that offer bad credit loans or subprime loans. Alternative lenders, online lenders, and credit unions may be more likely to give an individual a line of credit if they have bad credit, but you may also be able to negotiate a line of credit with a traditional bank.

It's important to review your loan terms carefully, including the interest rate and associated fees. Consider whether the line of credit fits your financial situation and whether you can realistically add more credit to your plate. While a line of credit can help you finance large purchases or keep you afloat in emergencies, too much credit can increase the likelihood of missed payments, defaults, and bankruptcy.

Tips to get easy approval on a line of credit with bad credit in Canada

Here are some tips to improve your chances of getting approval on a line of credit with bad credit.

Understand your credit report

Your credit report is an ongoing documentation of your financial well-being. It contains important information about your debts, credit limits, payment history, and credit accounts. Obtain a copy of your credit report to understand what factors are negatively affecting your score and how you can fix your bad credit score. You can get a copy of your free credit score from a financial institution, like KOHO, or request a free annual report from one of the major credit bureaus in Canada.

Correct errors

Creditors and lenders use your credit report to determine whether to extend a line of credit. Periodically check your report for potential errors or inaccuracies. Dispute mistakes immediately with the credit bureau so these errors don't harm your credit score.

Offer collateral

Some lenders take collateral to secure a loan. It reduces the lender's risk as they have compensation if the borrower defaults on the loan. Collateral can be anything from a house for a mortgage, a car for an auto loan, or a cash deposit for a personal loan or a line of credit. Lenders are more likely to approve your application despite bad credit if you have collateral to back it up.

Start small

If you're in a tough financial situation, you may not be able to secure a line of credit with a high credit limit. However, the lender may approve a smaller loan. As you demonstrate financial stability and good credit management skills, you may qualify for a limit increase on your credit line in the future.

Shop around

Different lenders may have varying requirements to approve a line of credit. Some lenders and creditors require a high credit score and income, while others may consider more factors to assess your overall financial well-being to handle a line of credit. Shop around and compare offers from various lenders to find one willing to work with your situation.

Provide evidence of income and financial stability

Demonstrating income and financial stability can improve your chances of approval for a line of credit. Provide documentation such as proof of employment, pay stubs, and tax returns to support your application.

Improve your credit score

Improving your credit score over time is one of the best ways to increase your chances of approval for a line of credit or any credit account. A good credit score indicates strong creditworthiness and low credit risk, which lenders love to see. Your credit score can change monthly based on your financial behaviour, like payment history, credit utilization ratio, and credit history. When you make payments on time, reduce outstanding debt, and avoid applying for new credit unnecessarily, your credit score can start to increase.

Communicate with lenders

Sometimes, life throws challenges that put you in a tough situation financially. Maybe you lost your job or had costly medical emergencies. Some lenders may be more forgiving about your bad credit and overall financial situation if you explain what happened.

Benefits of a higher credit score when looking for a loan in Canada

A higher credit score reflects positively on your creditworthiness and offers several benefits when applying for a loan in Canada.

Lower interest rates

Lenders typically offer lower interest rates to borrowers with higher credit scores. Lower interest rates make borrowing money cheaper, and you'll pay less interest over the life of the loan.

Higher loan amounts

Individuals with higher credit scores may have higher credit limits for their line of credit. For example, you may get approval for a line of credit with a $10,000 limit instead of $5,000. A higher limit allows you to finance bigger purchases and projects.

More favorable loan terms

A good credit score can help you negotiate more favorable loan terms with the lender. For example, you may have longer repayment periods, or the lender may waive certain fees.

Quicker loan approval process

A high credit score indicates better creditworthiness and credit management skills. Lenders may expedite the approval process for borrowers with high credit scores as they pose less risk. You can access funds more quickly when needed.

What is the lowest credit score to get a line of credit?

The minimum credit score to qualify for a line of credit can vary depending on the lender. A fair credit score is typically anything above 600. While you can find lenders that approve lines of credit for individuals with a fair credit score or lower, most lenders prefer scores of 700 or higher for favourable terms and rates.

If you have a lower credit score, you may find better luck securing a loan with an alternative lender or a financial institution specializing in bad credit loans. Traditional lenders may have stricter terms and higher interest rates for individuals with bad credit. It's a good idea to shop around and explore different options to find the best option for your situation.

Tips for comparing loans for bad credit

While interest rate plays an important role in how much you'll pay for a line of credit, it's essential to look beyond it to get a more comprehensive view of what you're applying for. Here are some tips to help you compare bad credit loans.

Fees and charges

In addition to the interest rate, a line of credit may have additional fees or charges. Common fees include annual, maintenance, transaction, and cash advance fees. Factor these charges into the overall cost of the line of credit to get an accurate estimate of how much it'll cost to keep the line of credit open and borrow money from it.

Repayment terms

Repayment terms include the minimum monthly payment, repayment schedule, and any penalties for late payments or exceeding the credit limit. Choose a line of credit with repayment terms that are more easily manageable for your budget and goals.

Credit limit

The credit limit determines the maximum you can borrow from your line of credit. Avoid borrowing more than the credit limit to minimize interest costs and other fees. Lenders use many factors to determine your credit limit, so review your options carefully and choose a line of credit with a limit that fits your needs.

Collateral requirements

Secured lines of credit may offer lower interest rates and higher approval chances, but they may require collateral to secure the loan. The collateral can be at risk if you default on the loan, so weigh the risks of depositing collateral against the terms and conditions of the line of credit.

Credit reporting

Good credit activity helps you build a better credit score. Confirm if the lender reports your timely payments to credit bureaus and factor this into your decision if credit improvement is a priority. Using a line of credit responsibly is a great way to ditch your bad credit score and improve your chances of getting loans in the future.

Flexibility

Consider lines of credit with the flexibility to access funds and make repayments. Look at factors like the availability of online account management, mobile banking options, and the ability to access funds through checks, debit cards, or bank transfers.

Customer reviews

A lender's reputation is just as important as the terms of a line of credit. Getting a loan from a reputable lender with positive reviews can make your life easier when dealing with customer service. Check online reviews and ratings from existing customers for positive experiences, complaints, or regulatory actions. A reputable lender is more likely to provide a transparent and fair lending experience.

Loan terms and conditions

Review the terms and conditions of your line of credit carefully before agreeing to anything. The interest rate on a line credit is usually variable, meaning it can go up or down. Pay attention to details like interest rate changes, repayment terms, and clauses that may impact your ability to access or repay the borrowed funds.

Alternatives to a line of credit

Consider the following credit accounts if you're looking for alternatives to a line of credit.

Personal loan

A personal loan provides a sum of money upfront, and you can use it to finance any purchase. You repay the loan in fixed monthly installments over the specified term of the loan. Personal loans typically have fixed interest rates and terms, making them more predictable and easier to budget for than a revolving line of credit.

Credit cards

Credit cards offer revolving credit you can use for purchases, balance transfers, and cash advances. They can be useful for short-term financing or building credit as long as you keep up with payments and monitor your credit utilization rate. While credit cards typically have higher interest rates than lines of credit, they are a useful alternative.

Home equity loan

A home equity line of credit (HELOC) allows you to borrow against the equity of your home. Your home equity is the value of the property you own. A HELOC uses your property as collateral and often has lower interest rates. You can borrow against your home equity and repay the borrowed amount with interest at any time.

Secured loans

Secured loans require borrowers to provide collateral, such as a car or a home, to secure the loan. Lenders may be more willing to lend to individuals with bad credit because they have the reassurance they can confiscate the collateral if the borrower defaults on payments. Interest rates for secured loans may be higher for individuals with poor credit scores.

Payday loans

Payday loans are short-term loans typically designed to be repaid by the borrower's upcoming paycheck. These loans can range from a few hundred to thousands of dollars and give borrowers quick access to cash for emergencies. Payday loans often come with higher interest rates and fees, making them very costly for borrowers. If the borrower doesn't repay the loan in full by the deadline, they may incur additional fees, leading to a debt cycle.

Borrowing from retirement accounts

You may have the option to borrow against your retirement savings for specific purchases, such as purchasing a house. It's essential to consider the long-term impacts on your retirement savings and any associated fees or penalties if you don't repay the funds within the specified period.

Borrowing from friends or family

Borrowing from friends or family is an easy way to access money when you need it. However, it's crucial to borrow money from a trusted person and make these arrangements with care and clear communication. The last thing you want is to strain your relationship with a good friend or family member.

Sign up for a line of credit with KOHO

Whether you want to build credit with KOHO or repair your low credit score, we can support you on your financial journey and goals. There are three ways to build credit history: a secured line of credit, a KOHO line of credit, or both. Regardless of which option you choose, there's no interest or applications.

We give you the convenience of spending instantly with a virtual credit card, making it easy to make purchases online and in-store without reaching for your wallet. Worried about penalties for going over your limit? Overdraft protection coverage has you covered. Get up to $250 cash advance at zero interest as long as you pay the subscription fee and repay your balance.

Regardless of where you are in your financial journey, whether you're looking to earn interest, get rewarded with cash back, or finance the next big milestones in your life, learn about how KOHO can support you every step of the way.

Note: KOHO product information and/or features may have been updated since this blog post was published. Please refer to our KOHO Plans page for our most up to date account information!