If you want to improve your credit score, you might mistakenly believe that the best thing to do is to completely avoid getting into debt. However, not having any debt can actually have the opposite effect when it comes to your credit rating.
If you don’t have any credit, and no history of paying any loans back, potential creditors have no idea what you might be like as a borrower — and may be reluctant to lend money to you as a result. On the other hand, borrowing via a personal loan can actually help you improve your credit score — as long as you borrow responsibly.
Show Lenders You’re Eligible
Your credit file doesn’t just show the loans and credit cards that you have; it also lets potential lenders know if you have been recently rejected after applying for credit. If you’ve been accepted for a personal loan, this lets other lenders know that you are eligible to borrow money and that other lenders don’t have a problem letting you borrow, which will always work in your favor.
Improve Your Score With Repayments
When you take out a personal loan, it’s important to calculate how much you’re going to be able to comfortably borrow. Being late with or missing a repayment can leave your credit score plummeting. On the other hand, responsibly making regular repayments on time each month will improve your credit score drastically. It’s important to do your research into getting the best loan for you; this Marcus review shows how much getting a loan has changed.
Improve Your Borrowing Potential
When you take out a personal loan and pay it back responsibly and on time, your credit score will subsequently improve. Even better, once you’ve repaid your personal loan, other lenders will see that you’re a responsible borrower who can be trusted, making it easier to borrow larger amounts of money in the future. It will also make it easier to borrow money for large purchases, like a new home.
Consolidate Your Debts
If you already have existing debt and are worried about a drop in your credit score, another way that a personal loan can help you improve your rating is by providing you with funds to consolidate your existing debt. Several debts on your credit score can have a negative impact, so the fewer lines of credit you have open at any one time, the better. You can use a personal loan to consolidate all your debts, leaving you with one, easily-manageable loan to repay instead of several. Repaying your existing debts will improve your credit score — and by continuing to make timely repayments on your consolidated loan, you can improve it even further.
How to Choose the Right Personal Loan for You
When shopping for a lender, it’s important that you look for a personal loan that you’re not only likely to qualify for, but also are able to afford. Consider:
Eligibility Checkers. It’s a wise idea to use an eligibility checker tool to help you determine which personal loans you are going to be in with the best chance of being accepted. These tools will perform a soft search that does not affect your credit score, to let you know which loans you have the best chance with.
An Affordability Check. Before you go ahead and apply for a personal loan, it’s important to take some time to draw up a budget and determine your income and outgo, to figure out exactly how much you will be able to afford to put towards repaying a loan. Missing payments, making payments late, or being unable to make the minimum payment in full can all have a very detrimental effect on your credit score.
Your Existing Debts. It is also worth considering any existing debts that you have before you apply for a personal loan. Be sure to include the repayments for these debts when you conduct an affordability check and make sure that you will still be able to continue comfortably repaying them even with the extra credit – unless you are using the personal loan to consolidate them.
Borrowing Only What You Need. It can be tempting to borrow more money than you need if you are able to, however, bear in mind that this will lead to higher repayments and interest rates. That’s why it’s advised to only borrow the amount of money that you need and don’t be tempted to take any higher offers.
The Bottom Line
When you borrow money and make repayments responsibly, a personal loan can have a very positive impact on your credit score. The key is to make sure you borrow responsibly.
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