How can a guarantor loan help my credit score?
If you are struggling with a bad credit score and need access to finance, a guarantor loan can help you build up regularly payments and get your credit rating back on track.
Improving your credit score is vital if you are trying to, (or intend to) apply for a loan, credit card, or mortgage in the future, and it is important to remember that it is possible to change your score – nothing is set in stone. But how exactly does getting a guarantor loan help with your credit score? We break down how this type of financing can help you.
What is a guarantor loan?
Before going into the finer details, let’s clarify just what exactly is a guarantor loan so that you are fully aware the differences between other types of loans that are available.
A guarantor loan is when a lender agrees to provide an unsecured loan on the basis of the credit agreement co-signed by a guarantor. The guarantor is chosen by you, and it can be whoever you choose – family or friend. These loans are particularly popular with those with a bad credit score, as a guarantor loan is usually approved on the basis that the willingness of a guarantor to sign your agreement indicates your creditworthiness.
It also means that should you be unable to make repayments for any specific reason, the presence of a guarantor means that the lender will still receive the money they have loaned, as the guarantor would pay this amount on the borrower’s behalf. Guarantor loan applications tend to have a far higher percentage of approved applications compared to those provided by traditional lenders or banks based upon this very reason.
Our website is dedicated to helping customers compare guarantor loans so that they can find the right product to suit their requirements – especially in terms of loan amount, loan term and more.
How guarantor loans can help your credit score
One of the main factors that can help improve your credit score over time is demonstrating your ability to make repayments promptly. Consequently, by paying your guarantor loan monthly payments on time, you can improve your rating.
How? Well, when you take out a loan or another type of credit, this information is automatically transferred to your credit file to the three main credit reference agencies: Callcredit, Experian and Equifax. These credit check bureaus are the companies that lenders turn to in order to determine your eligibility for further credit.
This means that if you promptly make repayments on a guarantor loan, or conversely fail to, this information is then put onto your credit file, in order to help determine whether you are suitable for other credit based on your credit history. As a result, if you can make repayments this will help to show to lenders in the future your creditworthiness.
What other information is on my credit file?
It is important to note that there are a number of different criteria that determine whether you are approved or declined for credit by a lender. It is based on an amalgamation of information on you provided by credit reference agencies, which is then used as a guideline. The financial information held on you includes:
- Length of credit history
- The number of bank accounts you have
- Credit you currently have available to you
- Type of accounts
- Payment history and amount owed.
- Any late payments
- Exhausting spending limits
- Defaults on any accounts open or closed
- Credit search footprints
What is credit search footprint?
The above information on you stored by credit reference agencies may not come as much as a surprise, perhaps apart from the last point. What is a credit search footprint exactly? Despite the ambiguity of the term, it is, in fact, straightforward, and there are two types you should be aware of: a hard footprint and a soft footprint. These terms are particularly important to be aware of, especially so if you are trying to improve your score alongside applying for a guarantor loan.
Hard footprints refer to any applications for credit that has meant that the lender in question has carried out a full check on your credit history to determine your eligibility. This type of check will stay on your credit file for at least 12 months (and can remain for up to six years on your file) and is another piece of information that other lenders will use to approve or decline any other loans or mortgages you make in the future. This is why it is generally recommended to not make multiple loan applications all at once, as it can also affect your score by suggesting to potential lenders that you are desperate for money and therefore might struggle to make repayments at a later date.
Soft footprints, as the name suggests isn’t a full check on your file but rather to check certain detail to decide whether to approve you for a loan. A soft credit search footprint does not affect your credit score in the same way as a hard credit search footprint as it is not shown on your credit file.