Can I Improve My Credit If I Take Out a Loan?
There is an age old question, and a “Catch-22”, if I don’t have credit, how can I get credit?
This also ties in with trying to improve one’s credit rating and credit score.
Someone may have a low credit score for many reasons, and not always due to previous bad credit in the past.
Some people may have a low credit score simply because they are not credit active, they do not have a credit card, overdraft, or have ever taken out a loan.
This leads us to the question, will taking out a loan improve my credit score?
The answer, not to be vague, is it may help to improve your credit score, but there are other ways to do this as well.
First, let’s look at what makes up our credit scores, for now, as credit scoring is changing, and we are moving towards a more social scoring system.
What is Used to Create Our Credit Scores?
Currently there are five areas or factors used to create our credit scores:
Payment History: Payment history makes up 35% of your credit score, so the Lion’s share of what is your credit score, which means, you need to pay your accounts and bills on time. By not doing so, you risk lowering your credit score very quickly.
Amounts Owed: The total amount you owe on your accounts makes up 30% of your credit score. Having credit cards “maxed out” and having high balances can also reduce your credit score.
Oddly enough. Having 3 credit cards with high balances is bad for your credit score, but if you can open a 4th or 5th credit card, transfer some of the balances over to show all accounts with reasonable balances, and not so high, it can help your credit score.
How Long We Have Had Credit: How long you have been in the credit system or credit bureaus, makes up 15% of your credit score. The longer you have had credit, and your oldest accounts, help your credit score.
Types of Credit We Have: The types of accounts or credit we have makes up 10% of our credit score.
Accounts such as catalogues, and other similar credit accounts, do not have the impact of a credit card, or personal loan.
New Credit: Applying for new credit affects our credit scores as well, to the tune of 10%.
This means that if you apply around for credit, the inquiries will reduce your credit score.
There are two (2) types of inquiries:
Hard Inquiries: These inquiries or “footprints” show on your credit history when you apply for credit, and they can reduce your credit score.
Soft Inquiries: These types of inquiries are done when you use an eligibility checker for a credit card or loan, or when you look at your own credit history, or if you give your employer or perspective employer permission to review your credit file.
These inquiries or footprints DO NOT affect your credit score.
So Does Taking Out a Loan Help Our Credit Scores?
In some situations and under some circumstances, yes, a loan can help your credit score.
If you have no credit, or previously had bad credit, some loans can aid in improving your credit score if you pay the loan as agree in a timely manner.
Loans such as guarantor loans, can help with this as well.
There are other ways to build-up a credit score.
Rental Exchange: Not all landlords participate in this programme, but more should, it is called the Rental Exchange.
It is where landlords report the rent their tenants pay to them just as a loan would be reported as being paid each month.
The landlord has another tool to as an incentive for their tenants to pay their rent on time, and the tenants get credit for paying their rent on time.
Electoral Register: Getting on the electoral register is another way to help your credit. Many lenders use the electoral roll to verify you are who you say you are, and also to confirm your address.
There are also credit builder accounts and credit cards available that also can aid in improving one’s credit score.
However, a good starting point is to obtain a copy of your credit history and credit score to see where you stand. It also gives you a baseline to know if you need to improve your credit score or not.