What Is Situational Bad Credit?

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Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.

, Contributing Writer - June 23, 2020

There are two main types of bad credit: situational bad credit and habitual bad credit. Situational bad credit is usually viewed in a better light than habitual bad credit in the eyes of lenders, and here’s why.

Difference Between Habitual and Situational Bad Credit

Situational bad credit has more to do with unforeseen life events that caused a credit score free fall. These events are life-alternating and cause a change in your finances or living situation, which can negatively affect your credit score.

Missing a few payments, or having late payments, can really impact your credit score in a bad way. This is because the FICO scoring model gives payment history the most weight. So, when someone loses their job and misses a few car loan payments, it can really hurt their credit score, even if they’ve had a good payment history in the past.

A habitual bad credit borrower has a history of missed payments, late payments, repossessions, and/or other credit issues. This is different from a life event that caused financial difficulty in an otherwise spotless credit history. Therefore, lenders typically view habitual bad credit as more of a risk.

There are lenders that work with both types of bad credit borrowers. However, situational bad credit is probably going to be looked at more favorably, because there are outside events that cause a drop in credit score. In other words, you were once a good credit borrower, but life changed and your credit score dropped as a result.

Examples of Situational Bad Credit

The most recent example of situational bad credit is the coronavirus pandemic, which has sparked stay-at-home orders across the world, creating temporary lockdowns in an attempt to limit person-to-person contact, which is how the virus mainly spreads.

The unfortunate side effect of encouraging everyone to stay home is that many people may now have gaps in their incomes. The result is that many consumers are left with no choice but to pick and choose which bills to pay while they wait it out until things reopen.

If you’ve had a solid credit history, but a life event caused some issues with your payment history and, therefore, lowered your score, it's likely to be considered situational bad credit. This means that a lender may look at your current credit score more favorably than habitual bad credit, and consider the circumstances that lowered it.

Some other situational bad credit examples include:

  • Divorce
  • Disability
  • Illness
  • Bankruptcy due to situational reasons

If you need an auto loan, there are lenders that are willing to work with borrowers in challenging credit situations; you’re still going to need to meet the requirements to be considered, though.

Qualifying for Auto Financing With Bad Credit

Even if your bad credit is the result of a life-changing event and situational, you still need to meet the conditions of bad credit auto lenders.

Bad credit lenders, or subprime lenders, are third-party lenders that offer loans through a dealership’s special finance department. Subprime lenders review your credit reports, but if your bad credit is situational, they check other items to get a better picture of your potential as a borrower.

They vary in their requirements, but they usually look for a steady earned income, a stable residence history, a solid work history, a down payment, and possibly other items proving you are able and willing to repay a car loan.

After you submit a credit application with a dealer that has a special finance department, a subprime lender that can work with you verifies the information on your application, so expect to furnish these items to finalize things:

  • Recent computer-generated check stubs to prove your income
  • Recent utility bills (or bank statements) in your name to prove your residence
  • Valid driver’s license with current address to prove your identity
  • A recent phone bill in your name to prove you have a phone
  • Down payment of at least $1,000 or 10% of the vehicle’s selling price
  • A list of five to eight personal references with complete contact information

Finding a Bad Credit Dealership

Once you’ve found a special finance dealership, applied, and submitted all your documents, you could be well on your way to getting your next auto loan.

Having situational bad credit doesn’t mean that you’re always going to have bad credit. Subprime lenders report car loans to the credit reporting agencies, which means that you can get into the vehicle you need, with the opportunity to improve your credit score with on-time payments.

However, finding a subprime lender may be a little trickier considering the current shaky circumstances. Dealers have been considered an essential business in many states with stay-at-home orders, but while these orders are being lifted or relaxed across the U.S., it can still be hard to tell which dealerships work with bad credit and which ones are open.

We want to help with that. Here at CarsDirect, we have a nationwide network of special finance dealers that are equipped to work with all types of credit situations. To get matched to a dealership in your area with subprime lending options, fill out our free auto loan request form, and we’ll get right to work for you.

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, Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.

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