Can loans improve your credit score? An interesting thought.

By Natasha Culzac

A loan can help your credit score if repayments are in full and on time, but you don't necessarily need a loan at all.

Loans can improve your score but they’re can be an  expensive and needless way to do it if you don’t actually need the cash. If you don’t need the money, there are numerous other things you can do to improve your score.

Why shouldn’t I get a loan?

Because you will have to pay a certain amount of interest on that loan. That’s the cost of borrowing the money and if you didn’t need the loan in the first place, is just cash down the swanny.

It’s also quite risky to apply for a personal loan if you’ve got a shaky credit history, because loans are traditionally harder to get than credit cards. If you’re declined and you apply for another line of credit afterwards, that lender will see that you’ve just applied for something else beforehand. They won’t see that you’ve been rejected, but it won’t look good and could further affect your chances of being accepted. Be aware that each application for credit stays on your record for a year and that in this time each new application compounds the next particularly if there a number of searches in a short space of time.

What about a payday loan?

Though getting a payday loan and settling it in full and on time doesn’t actually hurt your credit score, the fact that you got one out can negatively impact your chances of getting credit in the future.

When you next apply for credit, that lender will be able to see that you got a payday loan out and depending on its own criteria for approval, may reject you on the basis that your financial situation must have been precarious because you went down that route. Payday loans have even been known to scupper future mortgage applications. It might not harm your credit score, but the fact that you got one will be sitting on your report for six years.

So what could I get to improve my score instead?

A credit card would be a safer bet. After all, your score is helped mostly by uninterrupted, on-time payments of your debt and this is easily achieved with a credit card.

Don’t max out the credit card: a maxed-out card hurts your credit score. Basically, lenders want to see that you aren’t using the full amount of credit available to you. If you are, it looks as if your head is barely above water.
If you already have a credit card, you can simply work with that rather than apply for a new one. You could even ask to increase your credit limit so that you’re using a smaller percentage of your available credit – just make sure you don’t spend it!

If you're still wondering what a good credit score actually means - read this handy article.

What if I have a poor credit history?

You can still get a credit card, but it may have to be a higher interest one. The thing you want to avoid doing is to keep applying - and getting rejected - for credit cards. A barrage of applications will hurt your score. Instead, use a tool like MoneySupermarket’s eligibility calculator to see which card will suit you the best before you apply for it.

Be aware that if you have a bad credit history, you probably won’t be offered the headline rates or the best deals shown on a lender’s website. uSwitch has a list of credit-building cards for those with a poor history. To avoid paying interest on the credit card, pay off anything you spend before the month end. Do not, whatever happens, miss a payment.

Top takeaway

You can kill two birds if you both need a loan and need to up your credit score. Already getting a loan for some home improvements? Bingo! Just make sure you’re on top of your repayments and your score will improve as you go. If, however, you don’t actually need a loan but you do want to better your credit, it’s a lot cheaper and less risky to get out a suitable credit card, which will do exactly the same thing.


By Natasha Culzac

Thanks to a journalistic career history and a childhood at Sylvia Young Theatre School, Natasha has her fingers in a few professional pies, doing her best impression of a model and actor as well as personal finance writer. Outside of work she compulsively watches BBC period dramas and constantly lies to herself that this year will be the year she learns French, once and for all.

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