How guarantor loans can improve your credit score
By repaying a guarantor loan on time, you are able to improve your credit score. By demonstrating that you are able to pay a loan off whether its a guarantor, logbook or payday, it is showing your creditworthiness.
So whenever you repay a loan, the information is reported by the lender to a credit reference agency such as Equifax, Experian or CallCredit and this will update your credit score accordingly. The information needs to be sent to an credit reference agency because if you default on a loan, the information must be available to all other lenders that might run a credit check on your because if you cannot repay one loan, having access to further loans may worsen your financial situation. On the flip side, if repaying the loan on time improves your credit score, it will make it easier to access other forms of credit and finance in the future from other lenders.
Guarantor loans are therefore popular for those borrowers who have bad credit and might have been turned down by traditional banks and lenders. With the help of a family member or friend as their guarantor, they are able to prove their creditworthiness and rebuild their credit score. In several cases, the guarantor could probably lend the borrower the money but they are likely to be someone who really cares for the borrower and wants to see them rebuild their credit rating.
How a credit score works
A credit score is a number formulated on how well you have paid other forms of credit in the past such as credit cards, personal loans, mortgages, payday loans and more. Credit scores can be broken down into five categories; very poor (0 – 560), poor (561 – 720), fair (721 – 880), good (881 – 960) and excellent (961 – 999). The more loans that you repay on time, the higher your credit score will be. But if you fail to repay your loans and other forms of credit on time, you will have a lower credit score. Your score can constantly go up and down based on how well you repay your debts. So if you have a bad credit score, this can always improve. But if you have a good credit score, you will need to keep repaying on time to consolidate your high score.
Your credit score is dynamic – it can always go up or down depending on various factors.
The credit score will also consider how many other loans you have open, how long they are open for and how many applications you have made (see diagram below). Obviously having a good credit score will make it easier to access finance compared to those with a poor credit score. Other things that are taken into account include applying for lots of loans in a short space of time. Every time you apply with a lender, they are likely to run a credit check on your account and this leaves a ‘footprint‘ on your credit file stating that a lender checks your account.
This footprint lasts for around 12 months but have lots of these in a short space of time suggests that you might have been desperate for money and this will be unattractive to a lender. Ultimately, the credit score is supposed to give a full overview to the lender so when they run a credit check prior to giving you a loan, they should be able to tell whether you are a suitable candidate for their loan or not.
What is a credit score made up of?
- Your payment history
- Types of credit
- New credit
- Length of credit history
- Amount owed/debt
Hard vs Soft Footprint
A hard footprint is a ‘hard’ credit check carried out by the lender and will stay on your credit file for at least 12 months.
A soft footprint does not show up on your credit file and is a ‘soft’ check by the lender. Some lenders do not require full checks or a soft check is carried out to check a spouse or partner of the individual applying for a loan.
Things to improve your credit score
Other than repay your loans on time and making lots of enquiries, there are several other things you can do in order to rebuild or maintain a high credit score:
Register on the Electoral Roll
This is supposed to encourage people to vote and register their address. However, the idea is that if a lender is running a credit check on your account and they have proof about your name and where you live, it makes you a much stronger lending proposition.
Check your credit score regularly
There are free trials available from the likes of Experian and Equifax where you can check your credit score. It is useful to be on top of your score and how it changes and understanding it better will help you maintain it in the future
Pay your loans, cards and bills on time
Although this seems obvious, failing to keep up the repayments on your loans, cards and bills sends the message back to the credit reference agency and causes your credit score to fall.
If you have a mortgage with someone who has bad credit, this may also be taken into consideration by lenders and may reduce your credit rating.
The Longer The Better?
Young people may not have a credit score at all because they have no history of transactions. This is tough for lenders when processing an application because they have no indication as to whether the young person is creditworthy or not. So the older you get, the more likely you can build up a strong credit score.
Don’t Apply For Too Much!
As mentioned earlier in this piece, you shouldn’t apply for too many financial products in a short space of time because it implies that you are financially stretched and in need of money. And because hard footprints might be placed on your file, they will last for up to 1 year.
One should avoid making too many applications with too many short term finance lenders and plus, one should not be using high interest loans to pay off other forms of credit. Customers are advised not to take out too many loans as it may lead to a debt spiral and loans like guarantor and payday loans should only be used for emergency purposes.