Loans are becoming increasingly common among Brits keen to consolidate their debts, pay-off their credit card bills and ensure they are on a more secure financial footing.
However, there is some concern about how certain small loans impact on credit scores. Many people shy away from loans for this very reason, but the truth is that they are more likely to help it than hinder it. Taking out and paying back a loan shows that you can be trusted with money to repay lenders.
Here are five ways that you can protect your credit score with these loans.
Entry on credit file
Lenders, such as Everyday Loans, share information with the credit reference agencies, so any unsecured loan will show up on file. This is particularly beneficial for people that have been turned away from traditional lenders for having too little credit history. It can be difficult to get other forms of credit without any previous data on your file.
Does not specify they type of loan
When you make an application for credit, whether it’s an overdraft, mortgage or credit cards, the lender will search your credit file. The loan will be there, but it will not specify what type loan. Therefore, the new lender will not be able to pass judgement on the type of borrowing. However, this might change in the future.
Credit scoring works by predicting how a borrower is going to act in the future. Therefore, paying off a personal credit loan on time and in full will demonstrate good borrowing, reliable behaviour and is likely to have a small positive impact on your score. However, it’s important to try and avoid borrowing small amounts often as lenders could see this as a sign of financial difficulty.
If you are unable to meet minimum repayments on other debt, such as a credit card or personal loan, a small loan might be able to help. While borrowing more for debt is not usually recommended, this income boost can just tide you over until payday. You’ll be able to meet your minimum payment and avoid a default on your credit file.
Pay household bills
Remember, it’s not just your traditional credit, such as loans and overdrafts that go on your credit file. Some energy providers, mobile phone providers, car insurers and other companies also share their customer information. If you make late payments to these, your score could be damaged.