Can Getting an Unsecured Loan to Improve Your Credit Score?

Your credit report throws light on your past payment behaviour. It serves as an essential document that lenders would peruse before signing off on your loan application. Your credit file reveals a lot of information about your finances. Based on the information given, lenders calculate a three-digit number score using their own mathematical formula and decide the approval. This score can fall in the range of the following categories, and each one of them indicates different possibilities for qualifying for a loan.

Credit score rangeCredit scoreWhat it means
Excellent961-999You will receive the most affordable deals.
Good881-960Not the most attractive deals will be offered to you.
Fair721-880OK, interest rates and credit limits will be high.
Poor561-720Higher interest rates, restricted borrowing limits
Very poor0-560You will most likely be turned down.

It is vital to keep your credit report stellar to avoid any roadblocks while borrowing money, but unfortunately, many people’s credit scores are not up to scratch. Thankfully, there are ways to fix issues, and one of those methods is applying for unsecured loans in the UK from direct lenders and paying them off on time. Well, can you say that getting an unsecured loan is a good way to boost your credit score? It will be too early to arrive at a conclusion. The devil is in the detail.

The repayment term plays a crucial factor

“Unsecured loans” is an umbrella term. Many people are under the impression that they are paid in instalments over a couple of months; the minimum repayment length cannot be shorter than six months. A small payday loan that you take out in exchange for a promise to pay it back after 14 days is also an unsecured loan.

You will see no improvement in your credit score despite paying them off in full due to the following reasons:

  • The whole sum is paid off in a lump sum. It does not indicate your loyalty to payments despite the ups and downs in your financial condition.
  • If the borrowing sum is £500 or less, your lender will not report your new account to credit reference agencies and therefore no on-time details are accounted.

A loan with a lump sum repayment has the capability to wreak havoc on your credit file. Credit reference agencies will be informed immediately of missed payments and defaults. In addition, you will have to bear the following consequences:

  • Interest penalties and late payment fees will be charged, adding up your debt cost.
  • Your credit points will plummet removing the scope for obtaining the most affordable deal.

You can improve your credit points with the help of unsecured loan instalments. Here are the reasons how:

  • It offers a good credit mix

Your credit mix account for 10% of your credit points. You will come off as a responsible borrower when you owe multiple types of debts and pay them off on time. Your lender will trust that you can responsibly handle instalment loans along with revolving credits. You are more likely to get the nod than those owing only one type of debt – for example, credit cards and lines of credit.

  • It helps build a payment history

Making payments on time will help you establish a good credit report. However, your lender is not bound to report your timely payments to credit reference agencies. You should ask your lender whether they do so before filling out the form.

Note: Partial payments do not contribute to your credit score. Make sure to make the full instalment every month. 

  • It helps whittle down your credit utilisation ratio

Most lenders will prefer to offer affordable deals to you when your credit utilisation ratio is low. A high ratio hints that you oftentimes rely on borrowed funds to make ends meet, and as a result, your lender will be skeptical about your repaying capacity. Replacing revolving credit with instalment personal loans can reduce your credit utilisation ratio.

Asking for a quote can ding your credit score

In order to get personalised deals, borrowers often receive quotes from different lenders. It allows them to compare each other’s interest rates. Many borrowers believe that receiving quotes will not affect their credit rating as the estimated rates will be told based on their financial details only. Lenders will run a “hard check” when they will put in a request for a loan.

However, there are some lenders that make “hard inquiries” on your credit file when you want to receive a quote or loan price. Such inquiries can make you seem like a desperate borrower and so more of a risk to your lender. Chances are they will turn you down or offer exorbitant loans for bad credit with no guarantor. This underhand tactic is costing credulous borrowers a small fortune.

No “hard credit check” should be made unless a borrower formally applies for a loan or a credit card from a direct lender. A person asking for a quote should not be presumed a borrower. It is likely that they are curious to know about their prices, but not keen on buying a financial product from them.

As a responsible borrower, you should ask your lender if they will run a hard check on your credit file to know the quote.

Things you should consider taking out instalment loans

Here are the scenarios when bad credit unsecured loans will be a suitable funding source for you:

  • When you want to pay off high-interest debts

Replacing your credit card debt with instalment loans will help you avail yourself of affordable interest rates. You will pay down the borrowed sum over a period of months, so it becomes easier to manage.

  • You have come across an emergency

Have you come across a medical emergency? Do you need money to buy something urgent? Instalment loans with fixed payments can be a good option when an expensive emergency strikes up.

  • You want to remodel your house

Do you want to refurbish your house? Instead of using an expensive home equity line of credit (HELOC), instalment loans should be preferred. They are more affordable than a HELOC. You will not be at risk of losing your home.

The final word

 Getting an unsecured loan may or may not improve your credit score.

  • You will see no improvement in your credit points if you are to pay off the debt in a lump sum.
  • The repayment length should be at least six months and your lender must report on-time payments to credit reference agencies.
  • Missed payments and defaults can lower your credit score.
  • Asking for a quote or unsecured loan price from a few lenders can also take a toll on your credit rating.

You should apply for instalment unsecured loans when you need money urgently. Research interest rates and APRs carefully to choose the most affordable deal. Check your repaying capacity to avoid damaging your credit file.

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