How can bad credit loans help me rebuild my credit score responsibly?
A credit score, a three-digit number that your credit report reveals, plays a paramount role in determining your repayment capacity, although, by and large, it is not at the centre of a lending decision. Your credit rating is an acknowledgement of your past payment behaviour and also reveals the extent to which your previous debts would affect your future repayment ability. Therefore, lenders emphasise both a decent credit score and strong repayment capacity as underpinnings for their lending decision.
Table of Contents
- Direct Lenders and Subprime Borrowers
- How Could Bad Credit Loans Help Rebuild Your Credit Rating?
- Are Credit Builder Loans Enough to Improve Your Credit Score?
- To Wrap Up
Direct Lenders and Subprime Borrowers
Direct lenders generally target subprime borrowers who are refused elsewhere, meaning they have to bear high default risks. As subprime loans are not subject to collateral, they have no means to get their money back in the event of a default. The impact of late payments lasts for up to two years, while that of missed payments lasts for up to six years on your credit file. You cannot be able to borrow money at lower interest rates as long as late payments and defaults disappear from your credit file.
Fixing your credit score is the only solution when it comes to getting approbated for a loan at affordable interest rates, but the question is how you would do it.
How Could Bad Credit Loans Help Rebuild Your Credit Rating?
When your credit rating is already worse, you would not be able to qualify for a loan. If a lender does not repudiate your application, they would restrict the loan amount to be paid off in one fell swoop and charge high interest rates. But without borrowing money, you cannot ameliorate your credit score. It is a catch-22 situation. Fortunately, credit builder loans are out there to help you.
Credit builder loans are similar to poor credit loans, with the difference that they enable you to pay back the money over a period of six months. These small loans are aimed at subprime borrowers looking to improve their credit rating. The cost of the debt is spread across six fixed monthly instalments, which, if paid on time, are reported to credit reference agencies, resulting in an improved credit score.
Rebuilding your credit score with bad credit loans in the UK is not a cinch because these loans, on the contrary to credit builder loans, come with an exiguous amount of money, normally not more than £1,000 and are required to be settled in one go once and for all. Despite the settlement of the loan in full, you cannot see any significant improvement in your credit score because it does not demonstrate your commitment and loyalty to payments during the ups and downs in your financial condition.
Are Credit Builder Loans Enough to Improve Your Credit Score?
A credit score improvement cannot be done overnight. Even if you settle a credit builder loan on time, you cannot see a significant change in your credit rating. There are a number of factors that are taken into account to ensure your credit report is up to scratch.
First and foremost, the extent of damage decides how long it will take to rebuild your credit score. If your credit score is already in a “very poor” zone, you cannot expect any change soon.
Having said that, before considering the long-term impact of credit inquiries, missed payments and late payments, you cannot escape their influencing effects as long as they remain on your credit file.
A golden rule of thumb says that you should pause borrowing money for a while. It is a good idea if you do not borrow money at all for at least two years. A pause is also a little contribution, suggesting your ability to manage your finances more effectively and efficiently. Then, you should think of taking out a credit builder loan. You will see a little boost to your credit points if you make payments on time.
Pay Bills on Time
As long as you do not settle your debt, you cannot see any credit score improvement. You should try to set up autopay. This is convenient when you are juggling multiple debts. Make sure that your account has enough money when debts are due; otherwise, you will end up with overdraft fees too, mounting up debt pressure.
If all or some of your debts are due on the same date, you should consider having the due date changed for them. Your lender might help you with it. Make sure you put in a request for changing a due date before missing a payment.
Come Up with a Debt Payment Strategy
If you have been struggling with multiple debt payments, you should try to consider the debt avalanche or debt snowball method. A consolidation loan could also help you if you have multiple high-interest small loans, such as payday loans.
However, you should try to get to the bottom of the real cause of throwing you into an abyss of debt, because all aforementioned methods are not a solution to your problem of debt.
Use Experian Boost
Experian Boost can help you strengthen your credit score for free. This takes into account information that credit reference agencies do not consider worthwhile to determine your credit rating, such as your mobile bill payment history, utilities, rent, insurance, and other streaming services. All this information is added to your Experian Credit file. This is generally helpful for those whose credit score is abysmal and who are trying to ameliorate it.
To Wrap Up
If you want to rebuild your credit score, you cannot just focus on timely payments. You will have to focus on other points such as the number of credit inquiries, recent defaults and missed payments, a credit utilisation ratio and the like.
Credit builder loans could help improve your credit score, but they are not enough to do so. Try to discharge all your debts on time, and make sure that you do not rely on debt to meet your expenses.
John Milton is an experienced financial writer and personal loan expert with years of experience identifying the right category for people. He has been Chief Financial Expert at LoanChester in the UK and provides insights on the big deals of the lending institution. He is known for transforming the loan policies as per the unique needs of different borrowers. First, he focuses on what the borrowers require according to their favourable and adverse financial stances, and then he focuses on making a variety of personal loans affordable. John writes well-researched content on personal loans and also guides borrowers regarding their unique financial conditions. John holds a Ph.D. degree in banking and finance.
