A credit score is a three-digit number that must be impressive to avail yourself of a loan at a lower interest rate. Although it does not reveal a complete picture of your repayment potential, it gives information about your past payment record, a preponderant factor in estimating your future repaying potential.
Keeping a credit report up to scratch is not a cinch. Many people struggle to maintain good credit scores for one reason or another, which results in borrowing money at high interest rates. However, it does not insinuate that your good credit file is the be-all and end-all to avail yourself of affordable interest rates. There are various other factors of which paramountcy cannot be refuted.
Many people are under the impression that a small loan with bad credit can help boost their credit scores or credit history, but this is contrary to reality. First, you need to assimilate what small loans with bad credit actually are.
Bad credit small loans are aimed at helping you tide over during emergencies. They do not provide you with a large amount of money and therefore are discharged within a month. In other words, they are known as small emergency loans. You might find some lenders offering you an instalment payment plan, but unfortunately, the total repayment term will not last more than a month. The fact is that weekly or bi-weekly instalments put the same pressure on your pocket because the whole payment is to be made within that month’s income. You may find it a bit hard to adhere to the payment due to an account being in the red.
When you take out a small loan, you are required to clear the whole debt in fell one swoop. Normally, the whole debt is paid back within a month. Despite the full settlement of the debt, you will not observe any improvement in your credit score. It is because it does not reflect your capacity to make payments during the financial ups and downs. Lenders are particularly interested in knowing about your money management behaviour.
Long-term loans are generally paid back over a period of time. Your financial condition cannot be always promising throughout the loan tenure, and yet you are obligated to settle the debt on time. This requires strategic financial planning and budgeting. When you manifest your potential to pay down the debt despite financial challenges, this will help you build your credit score.
However, no credit score improvement not only boils down to a shorter repayment period. Most bad credit loans are not reported to credit reference agencies. For instance, payday lenders do not inform credit reference agencies of your on-time payments. The account is closed when the debt is settled. Although payday lenders are known to check your credit report while approving your application, the fact is that they make their decisions based on your income sources only. Since these loans are aimed at poor credit borrowers, the need for credit checks is obviated. It is presumed that applicants are subprime borrowers and hence they are charged high interest rates.
On-time payments are not reported because no account is opened in your credit report due to the absence of credit checks. However, this scenario exists as long as the borrowing sum is €500 or less. Some lenders check credit reports, no matter what, but in spite of that they are not obligated to inform credit bureaus of your timely payments.
However, remember that defaults will be reported, which means you will experience a sudden plunge in your credit points then.
Personal loans with bad credit can help boost your credit score. Unlike small emergency loans, personal loans are paid back over a period of at least six months. If you take out a personal loan and discharge it on time, you will certainly see an improvement in your credit score.
It is worth noting that your on-time payments will not significantly boost your credit rating because it depends on the damage your previous defaults and late payments have done. Older inquiries and defaults will not disappear before their stipulated timeframe. Their presence will cast a shadow on your potential to claim affordable interest rates. However, once they are removed from your credit file, you will see your overall credit profile becoming better.
When it comes to building credit history, credit builder loans are recommended. They are a type of personal loan. You will be lent a specific sum of money to be repaid in six fixed instalments. However, bear in mind that these loans are quite expensive. They charge high interest rates even if you have thin or no credit history at all. Make sure to apply for this loan only when you are completely confident about your repaying capacity.
In order to build your credit history or improve your credit rating, you should also focus on your credit utilisation ratio. Make sure you do not run an outstanding balance on your credit card. At the time of taking out a loan, your credit card balances must be cleared. An ideal credit utilisation ratio is not recommended more than 30%.
At the same time, keep an eye on your debt-to-income ratio. Although it does not impact your credit score, it is considered to decide your repaying capacity. It is always suggested that you borrow money from a reputed direct lender such as MyCreditBucks which is known for offering the most competitive deals in Ireland.
Small bad credit loans cannot help build your credit rating, nor can they improve, because they are paid back in fell one swoop. However, personal loans with an extended repayment period help boost your credit points.
