Broke? Bad Credit? Say Humbug to Lousy Holiday Loans

Dear New Frugal You,

About two years ago, I filed for bankruptcy. Is it possible for me to obtain a personal loan? I don't have money for the holidays and don't know what I'll do if I don't get my hands on some cash. Do you know of any place that would loan money to me?

- Kris

Dear Kris,

Being broke around the holidays can be difficult. It seems as if there's always something that requires a few bucks.

My guess is that you're not the only family that will struggle with the holidays. There were 1.55 million bankruptcies in 2010, so you're not alone.

As you already know, a bankruptcy hurts your credit score, making it more difficult to get credit cards or borrow money. Chances are that your credit score may have fallen by 200 points.

So what's an aspiring Santa to do? How can you survive the holidays without cash or the ability to borrow money?

Let's take a two-stage approach. First, we'll look at what can be done to improve your access to money. Next, we'll see if we can't help you survive the holidays on very little cash.

Begin with your credit score. You've taken a legitimate hit, but your file may also contain some errors. Studies vary, but some have found that as many as one in four credit reports include mistakes big enough to affect your ability to get credit.

You can dispute and correct any credit report errors you find. Unfortunately, with only weeks until the holidays, any corrections will be too late to help this year.You can pull your credit reports for free once a year from each of the three credit bureaus at AnnualCreditReport.com.

One method that's often used to begin rebuilding credit after a bankruptcy is to get a secured credit card. That requires you to put up cash to "secure" the card. Clearly that, too, won't help in your situation.

Another possibility is to apply for a store credit card, especially with one of the larger chains that carry a large variety of goods, such as Target or Walmart. Typically, store cards have lower credit score requirements than bank cards. This is probably your best hope.

Assuming that you do get a store credit card, don't make the card's credit limit your budget for the holidays. Spend only what you have to. Just because you can spend money doesn't mean that you should. If you're struggling with your bills now, adding one for holiday spending won't make January any easier.

If you're unable to get any type of credit card, the next logical step would be to search for a personal loan. Your bankruptcy makes the task more difficult. Most lenders will either want collateral or a very good credit rating. You have neither.

You can ask where you do your banking, but chances are you'll need to find a lender who specializes in bad credit loans. Do a Web search for "personal loans for bad credit." Be very careful. There are sharks in these waters. Some sites hype a low interest rate. But the fees and other add-ons can make those loans very expensive. Know exactly how much it will cost before you accept any money.

You may be tempted to check out payday loans. Please fight the temptation. Unless you need the money for just a few days (which isn't true for you), these loans will cost you 300% or more in interest on an annual basis. And that's an awful deal.

But there's a question you might want to ask yourself: "Should I really be looking for a loan?" Even if you can get one, it might be wise to turn it down. A personal loan with a high interest rate will make it impossible to save the money needed for a secured card. The loan itself could lower your credit score. In effect, you're moving further away from rebuilding your credit.

So far, Kris, we haven't been able to give you much hope. Let's see if we can change that now. Your question appears to assume that you need money to have a good holiday. Is that really true?

Sure, without money you can't travel or buy gifts. But there are many ways to enjoy the holidays without those things. Skype can put you face to face with family even though you may be thousands of miles apart. Some of the most memorable gifts are made, not purchased. And guests bring their own food and drink to some of the most enjoyable gatherings.

I wouldn't get too desperate if you don't have much money for the holidays. It could be that you'll discover entirely new ways to make them meaningful without the cash. You can find all kinds of frugal holiday ideas on the Web, ideas that can free you from the need to spend money to have a great season.

I hope you have a wonderful holiday!