A bad credit score, the bane of your financial credibility, is a concern of many especially those who are looking to get on the property ladder. Credit score improvement is more than a matter of luck, and it is not an overnight process. Your credit score, part of your affordability checks, speaks to your past financial behaviour and determines your credibility.
As you will be considered a borrower with a high default risk in case of a bad credit rating, lenders will charge high or rather extortionately high-interest rates, and to the surprise of many experts, the demand for such loans is on the rise.
However, the size of these loans is not so big then, normally aimed at funding small unforeseen expenses - for instance, you want to have your car repaired. Unfortunately, the same lender who agrees to lend you money when your savings fall short of cash to meet emergencies will be loath to sign off on a larger sum needed to do up your house.
Many of you believe that these loans can help improve your credit report. Can they?
Small loans have nothing to do with credit score improvement
A bad credit loan is one that you can avail yourself of despite a bad credit rating. These loans can be small as well as big. You can use these loans for small emergency expenses such as car repair or buying a new mobile phone when your savings fall short. When you take out these loans for wedding or home improvement, the size of the loan will be large. However, not all lenders will be willing to approve your application in that case. It depends on their risk-aversion policy.
Small emergency loans do not last for a long time. Since the maximum lending sum cannot be more than £1,000 in most cases, the amount will be paid back in a lump sum. A couple of lenders provide personal loans to subprime borrowers for major expenses, and therefore, the lending sum can go up to £3,000. In that case, the money will be paid in instalments, normally within three to six months.
No bad credit loans in Ireland can improve your credit score if you are to pay off the debt in a lump sum, as this does not reflect your financial behavior despite changes in financial circumstances. However, when you are to clear the debt in instalments that last for at least six months, you can prove that you stick to your payment behaviour. You will get the benefits of timely payments only when your lender informs credit reference agencies about it.
You will not see any improvement overnight
Now, you have understood that quick loans in Ireland cannot help improve your credit score as they are paid off once and for all on the due date. However, if you borrow a larger sum paid off within a period of six months, you are likely to see improvement in your credit score. But it is too early to jump to a conclusion.
First off, you need to understand that your credit rating can be bad because of multiple factors. Multiple inquiries continue to show on your credit file for two years while default can continue to stay on your credit file for six years. So, even if you pay off your small debt within six months, you will hardly see any improvement in your credit score. You will have to wait for a long time to fix your credit issues. Broadly speaking, you will have to be patient.
How can you fix your credit issues?
Here are the ways how you can fix your credit issues:
- Take out a credit builder loan
A credit builder loan can help you improve your credit report. These loans have been aimed at subprime borrowers, so you are more likely to get the nod for them. Even if the borrowing sum will not be large, a lender will let you pay down the debt in fixed instalments. If you make payments on time, this will help you fix your credit issues.
It might be difficult to take out a personal loan with a bad credit rating, so consider credit builder loans. However, bear in mind that you will have to pay high interest. These loans are expensive, so it is recommended to assess your repaying capacity first. Otherwise, you will end up badly affecting your credit score.
- You should wait until queries drop
Missed payments take two years and defaults take six years to drop off. These queries will stay on your credit report until the stipulated period is over even if you manage to pay off your debts on time. Therefore, you should take a pause in applying for a loan.
Whether you want to take out an emergency loan or a personal loan, make sure that there is one year gap. When these inquiries are old, they will not influence much decision of a lender. You will still get money at high-interest rates, but chances are they are not too high, and you will be able to borrow a slightly larger sum.
- Be careful of the credit utilisation ratio
Use your credit card more sensibly. You should ensure that you do not utilise too much balance of your credit card as it will increase your credit utilisation ratio. This will call your credibility into question as your lender will suspect that you oftentimes are dependent on credit. At the same time, you should also watch out for the debt utilisation ratio. It should be less than 30%.
The bottom line
Bad credit loans can help improve your credit score, provided they are paid off in fixed instalments over a period of time. However, this may not have an immediate effect. It will take a lot of time to fix your credit issues. You should always try to protect your credit score from going down because once it is plummeted, it can take years and can be extremely difficult to improve.
