When an emergency happens, more often than not, the only solution is money. If you have good to excellent credit, no problem, you simply put your emergency expense on a credit card, and the problem is solved.
But what if you have bad credit?
For those with bad credit, the answer has often been to take out a cash advance loan. The problem is that all too often, this leads to big financial trouble as these loans have a lot of drawbacks. Short loan terms and sky-high interest rates make a cash advance very difficult to pay back, locking down the borrower in a debt trap.
But is there another option? Believe it or not, there is, even with bad credit:
Your Other Money Options
Even with bad credit, there may be alternatives to a cash advance. Next time you find yourself in a money emergency, here are some other places to look.
Online lenders tend to be a bit more flexible with their credit requirements. If you need money for an emergency, there are lots of websites out there like Loanmonkey.net that may be able to put you in touch with a lender.
Do use caution when applying for a loan online. Some of these lenders can be just as bad as your local cash stores. Here are a few things that you need to look at before you decide to accept one of these loans.
First, look at the APR or Annual Percentage Rate. This is the actual interest that you would be paying on your loan when you take the interest and all fees into account. Make sure that this number is something that you can live with.
Second, look at the loan term. This will dictate what your payments will be. Is it long enough to give you time to get financially back on track? A term that is too short would have higher payments that might be a strain on your budget while you try to recover from your emergency.
This is one of the newest ways to get money. An app like Earnin.com can help you get a few hundred dollars in an emergency. If you choose to go this route, here is what you need to know.
These loans typically charge no fee or interest, which sounds great, but there is a catch. Instead of fees, in order to make money, they ask you to tip when you repay the loan. The amount you tip is up to you, but they usually suggest an amount. Be aware that the suggested amount often makes the loan APR close to that of a cash advance.
Also, the amount that you can borrow is limited. Several hundred dollars is about the max, but you might not even be able to borrow that much initially. Usually, you must build some history to gain access to max loan amounts.
This one might come as a surprise to you, but many employers will let you borrow money. All that you need to do is to respectively ask.
While not all employers will lend money, those who do realize that it is a winning decision. Doing so builds employee loyalty and helps to keep employees away from financially damaging predatory loans. Besides, there is no risk to the employer as most of the time, you will have already earned the money they are lending you.
Avoiding Future Problems
Once you get your money emergency solved, the next thing that you need to do is address the issues that got you in trouble. Here are two things that you should concentrate on.
Fixing Your Credit Score
Credit scores might seem like a mystery, but it is actually remarkably simple. Your credit score is simply a mathematical formula and therefore can be manipulated.
The biggest contributing factor to this score is your payment history. It represents about one-third of your score, so start paying those bills on time. Take advantage of automatic payments and bill reminders to make sure that it gets done.
Next, you need to look at credit utilization. This is another factor that makes up nearly a third of your score. Credit utilization is how much of your available credit you are using. You need to be using under 30 percent of your credit to be considered good, so start paying those credit cards down.
As you can see, just two factors are responsible for nearly two-thirds of your credit score. The remainder of your score is made up of smaller factors like credit diversity, the age of your credit history, new credit, and inquiries. Essentially, you want a long credit history that shows you know how to handle different types of credit. You also do not want it to look like you are always applying for new credit, so keep the inquiries down.
Starting an Emergency Savings
Once you set a plan for fixing your credit, your next step should be to start an emergency savings account. Once funded, an emergency savings account will prevent the need for these emergency loans in the future.
Ideally, you want to have four to six months’ worth of expenses in your savings. While that sounds like a lot, you can get there if you just take it one step at a time.
First, open a savings account that is separate from your normal checking. The last thing that you want is a saving that is linked to your regular checking. That makes it far too easy to raid your savings for an impulse buy.
Once you have your account, simply set up automatic checking transfers. Transfer money from your checking to your savings in the morning that you get paid. It is harder to miss something that you never see, so get it out of your checking ASAP.
*Photos by cottonbro