How Can I Obtain a Line of Credit With Bad Credit?

Avoid accepting loans to get out of debt.

A line of credit is a revolving fund extended by a lending agency that enables an individual to purchase goods and services. One of the primary criteria for obtaining credit is a good credit history. This record contains information about past financial obligations or outstanding debt (e.g. credit cards, bank accounts, mortgages and utility bills). If you have a lot of debt or don't pay bills on time, you may develop a bad credit history that can prevent you from qualifying for credit offers. Individuals in this situation may still qualify for home equity, pre-paid cards and business lines of credit. Keep in mind that these offers may have higher fees, large down payments and collateralization of assets.

Instructions

Prepare

1. Purchase a copy of your credit report from Experian, TransUnion or Equifax. View a free report online at annualcreditreport.com. Call 1-877-322-8228, or send a report request form to:

   Annual Credit Report Request Service

   P.O. Box 105281

   Atlanta, GA 30348-5281

2. Review your credit history for errors and discrepancies. Ensure the correct information is reported to all three major credit bureaus.

3. Begin to pay down outstanding debt. Establish a budget and payment schedule before applying for a new line of credit.

4. Establish proof of income. Maintain steady employment to demonstrate your ability to make regular payments.

5. Determine the purpose of the line of credit. Decide what items you will purchase with the credit. (e.g. down-payment on a house or car, medical expenses, major appliance)

6. Organize your paperwork. Gather proof of income, assets and identification to submit with your application.

Home Equity Line Of Credit

1. Apply with a bank or other lender to obtain a line of credit using your house as collateral (i.e. home equity line of credit).

2. Negotiate the amount of credit based on the value of your home. Borrow the minimum necessary to complete purchases.

3. Make purchases and repay the amount spent on purchases to retain ownership of your house.

Pre-paid Card

1. Review card options from Visa, MasterCard, American Express and other reputable, credit companies. Avoid responding to offers that require wire transfers or initial deposits. Examine the company's website and speak with a customer service representative to clarify the terms and conditions.

2. Submit an application for a prepaid, re-loadable credit card on-line or through the mail.

3. Activate the card with the company to verify receipt. Deposit funds into your account.

4. Use the card like a traditional credit card for purchases in-store and online.

5. Repay funds used to replenish funds. Add additional money to the card to increase the credit limit.

Business Owner With Bad Credit

1. Form a LLC (Limited Liability Company) or incorporated business. File the appropriate documentation with state agencies, such as the Secretary of State or Department of Commerce. Pay required fees.

2. Establish your business by gaining a steady clientele and demonstrating profitability. Open bank and/or credit union accounts using your business name. Set-up a steady place of business with functional address and phone.

3. Refrain from using personal credit cards for business purchases.

4. Apply for a credit card or collateral-based line of credit in your business name.

5. Use business lines of credit as a revolving source of funds for daily needs, large purchases or unexpected expenses.

Tips & Warnings

• Unexpected emergencies, erroneous paperwork, rising expenses and medical needs can lead to bad credit. However, obtaining more credit is not a cure-all. Pay down debt, budget carefully and try to save at least 10 percent of your income.

• Allow time for your credit history to improve before applying for loans.

• Instead of a line of credit, apply for financing to purchase a new or used vehicle. Look for businesses that specify "bad credit," "no credit check," or "guaranteed approval." A down-payment may be required.

• Do not obtain lines of credit for unnecessary purchases. Seek alternative sources of income (e.g. Individual Development Accounts, employment, family, personal savings).

• Consider joining a credit counseling agency if you are unable to escape debt. Free credit counseling agencies are able to provide tools and tips to help you repair your credit and manage debt.

References

• The Federal Reserve Board: What You Should Know About Home Equity
• HSBC: Line Of Credit, Borrowing, HSBC Business
• Chase: Home Equity Loan: Home Equity Line Of Credit
• JA/Goldman Sachs Foundation Personal Finance Prorgam: Count On It
• MasterCard: When To Open A Line Of Credit
• MSN Money: The Return Of The Personal Loan

Resources

• FTC: Your Access To Free Credit Reports
• American Consumer Credit Counseling: Consumer Credit Counseling And Debt Consolidation Services
• MSN Money: 7 Fast Fixes For Your Credit Score
• MSN Money: Need A Loan? Borrow Like It's 1975
• Experian: Establish Business Credit
• TurboTax: When And How To Incorporate