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There’s no mystery to it that there are a number of ways a personal loan can improve your credit score.
A personal loan is a type of loan you can take out from a lender where you don’t have to put any security up to receive the loan like your home, your car, or any other personal possessions.
Although it’s reassuring to know that none of these can be taken from you if you find in the future that you can’t make the repayments. But you should not take out a loan if you have any doubt about your ability to meet each repayment in full and on time. While you won’t lose your home, the lender will likely to take you to court if you miss enough repayments to obtain a county court judgement (CCJ) against you. If you have a CCJ against your name, it will be very difficult for you to find any company who will lend you money for the next six years.
Because your personal loan is unsecured, the interest rate you’ll pay on your loan will be higher than if you’d taken out a secured loan.
Before we share with you how a credit score is calculated, we want to share with you how the different credit reference agency differs in the way they report their opinion of your creditworthiness back to a potential personal loan provider:
| Equifax | Experian | CallCredit | |
| Average score | 700+ | 730-770 | n/a |
| Excellent credit score | 466-700 (maximum) | 961-999 (maximum) | 5 |
| Good credit score | 420-465 | 881-960 | 4 |
| Fair credit score | 380-419 | 721-880 | 3 |
| Poor credit score | 280-379 | 561-720 | 2 |
| Very poor credit score | Up to 279 | Up to 560 | 1 |
As you can see, each credit reference agency has their own ways of determining a score. However, they all consider the same things when they do their calculations.
Your credit score is on your credit report – a good way to think about your credit report is that it’s a constantly updated document keeping records of lots of different aspects of your financial life. The updates which take place the most on your credit report are your credit repayments and your bill payments – every time you make a repayment or payment in full and on time, that helps your credit score.
Alternatively, while missing one or two repayments or payments a year is not going to make any real difference to your credit score, repeated failure to pay lenders and suppliers what you owe them does strongly count against you and it will reflect badly on your credit score.
There are other bits of important personal financial information on your credit report. If you have loans, credit cards, and an overdraft, the report also records what your balances are (how much you have paid off on a loan or how much is outstanding on your credit card or overdraft) and your limits (how much you can borrow on your credit cards and on your overdraft). The reason they keep this information is that they’re keeping track of something called your “debt utilisation ratio”.
Put simply, the closer your balances are to your limits, the higher your debt utilisation ratio. Your report tells lenders how much of your debt facilities that you’re using and each lender when they see your report, will make their own decision about whether they’re happy or not with your ratio. It is a general rule of thumb though that the lower your debt utilisation ration, the more favourably a lender will view your application for a personal loan in the UK.
Credit reference agencies also keep details of any bankruptcies, defaults, CCJs, or individual voluntary arrangements against your name. Most lenders will not consider any applicant who is bankrupt, who has one or more CCJs, who has defaulted on a credit account, or who have agreed to an individual voluntary arrangement.
As we mentioned earlier, lenders tell credit reference agencies that they’ve lent you money, how much they’ve lent you, how much is left on your loan, and whether you make each repayment on time and in full.
If other lenders see that, when you take out a loan, you make sure that you meet each repayment every time then this will reflect well on your credit report. Once you’ve established a long history of meeting every repayment to your lender and to other providers of credit, any other lender you apply to will think that you’re a low risk and that will make them more comfortable in lending you money.
Another thing that credit reference agencies keep records on is the number of times that you apply for credit. Lenders get very nervous if you apply to lots of different lenders for loans within a short space of time because they might believe that you’re desperate for money.
This belief might be completely unfair – the chances are that all you are doing is trying to find the lender who will offer you a suitable rate. However, lenders don’t view it like that and, even if you try to speak with them about it, that might not make a difference.
A debt consolidation loan is a type of personal loan which you use to pay off all your other types of debt – other loans, credit cards, store cards, overdrafts, and so on. If you do it right, you could end up paying your debt off in full for less over a shorter period of time with a debt consolidation loan with lower monthly repayments.
If you want to apply for a personal loan, you can do so by using LoanTube, Financial Conduct Authority-licensed brokering service. We’re committed to finding you the right lender offering you a deal on personal loans that is right for you.
To start your application, please click here