As long as it is about taking out a small loan, you may not emphasise much about a good credit score. Thanks to online lending institutes that they accept applications from bad credit borrowers too. However, building a credit score can be an essential financial aspect if you want to buy a home or car.
If you need a small amount of money, loans for bad credit in Ireland can help you tide over. If you want to borrow a large amount of money, lenders will not sign off on your application if your previous payment record calls your creditworthiness into question. You should have at least a fair credit rating to finance significant needs.
This is when you will have to take specific steps to improve your credit report. However, a good credit rating is not the subject of worry for struggling to keep up with repayments. Many people have not built a credit rating because they have never borrowed money.
If you are looking to take out a mortgage, a lender will look at your credit score to check your creditworthiness, and if you do not have a credit file, lenders will not be able to trust you. This is when you may have to take out credit builder loans. Here is what it is and how it works:
Credit builder loans
First off, you need to understand that not all ways can benefit you to improve your credit score. For instance, if you have little or no credit history, credit builder loans will be an ideal option. However, if you have already taken on debt, credit builder loans will never be an ideal option.
Instead, you will have to think about paying off the debt or consolidating debt and negotiating interest rates. This is crucial to understand your financial circumstances. Credit builder loans do not require you to have a credit rating. A lender will approve your application based on your income. They know that you are taking out the loan to build a credit history.
How does credit builder score help you?
Credit builder loans allow you to borrow a small amount of money, not more than €1,000. These loans are also known as start-over loans. The term of these loans can be six months to one year. Unlike other small loans, the money you borrow is set aside as secured savings account that you cannot access until you make all payments along with interest.
As you keep paying each instalment, the lender will inform credit reference agencies of your payment. The term for these loans is extended for a year to show that you stick to your financial obligation despite changes in your financial circumstances.
Your payment history accounts for 35% of your credit score, which means if you have made all payments on time, your credit rating will be stellar. However, note that your lender will inform credit bureaus of your default if they are 30 days past due.
These loans do not work as other small loans because the focus is to help you two ways: improve your credit history and save money.
However, before you use these loans for building credit, you need to pick the right type of the loan. Make sure that you choose the repayment term that suits your budget. Choose a lender that reports your payments to all credit reference agencies. Longer-term can make payments more manageable, but you should avoid the one with more than 24-month repayment plan.
Once you have built a credit history, you can qualify for other loans like personal loans, credit cards, and mortgages at affordable interest rates. Note that you will have to take care of the following things if you do not want to lose your score down the line.
- Make timely bill payments
Whether you have no credit history or you have a poor credit rating, making all bill payments on time can help you qualify for the loan at better interest rates. If you are struggling to pay bills on time, you should revise your budget. Carefully analyse incomings and outgoings. Try to cut back on some expenses so you can put that money toward household bills.
- Keep credit utilisation ratio low
Once you become eligible for qualifying for credit cards, you can rack up the debt. This will lead to an increased credit utilisation ratio. High credit utilisation ratio affects your credit score. It should not be more than 30%. To keep it as minimal as possible, apply for a new credit card and avoid maxing out. With a new, unused credit card balance, the utilisation ratio will go down.
Do not close unused accounts. Closing unused credit card accounts can also ding your credit score because it will increase your credit utilisation ratio. For instance, if you have three credit cards each with a balance of €1,000 and you have used €1,500. Since the third credit card is spare, you decide to close it. If you do so, it will increase the ratio from 50% (1500/3000) to 75% (1500/2000).
- Stop funding your urges
Borrow money only when you need it urgently. A rule of thumb says that you should not borrow money to fund your regular expenses. If you can put off a purchase, do that. If it is urgent, try to consider your repaying capacity.
The final word
Credit builder loans are the best way to build your credit history. Although you can take out other loans, you will likely get them at high-interest rates because of having no credit history. Further, make sure that you do not make defaults in bill payments and keep credit utilisation ratio of less than 30%.