By repaying your guarantor loan on time, you can improve your credit score. Every time you make a monthly repayment, the information is sent from your lender to the credit reference agencies that they work with such as Experian, CallCredit and Equifax. So if you make your payments on time, the information is automatically updated to you credit file and your score will improve.
When applying for any type of loan, whether it’s a guarantor loan, personal loan or mortgage, the lender will typically run a credit check on your account through one of the UK’s credit reference agencies. Your recent credit transactions will always be up-to-date in real-time because the lender needs to know how well you have made recent repayments and whether you are right for their loan. So as soon as you repay your guarantor loan, your credit rating will improve.
The data between lenders and credit reference agencies is reciprocal meaning that lenders can get the information about an applicant’s credit score but they will be required to feedback relevant information such as defaults and repayments.
Why guarantor loans are common for those with bad credit
With a history of bad credit, it can be hard to get the finance you need and at accessible rates. Several lenders feel that if you have defaulted on previous payments, you may be deemed a riskier person to lend to.
However, with the help of a guarantor and preferably someone with a good credit history, you increase the chance of getting the funds you need because even if you default, you have the security of someone who has a good track record of repaying other loans and credit in the past.
Typically, the guarantor is a close family member or friend who wants to help the borrower get back on their feet. So by agreeing to be their guarantor, not only do they help them get a loan, but they can also allow the individual to prove their creditworthiness and improve their credit rating – something that will make it easier for them to access other loans in the future and better rates.
Several lenders that we feature on Guarantorloans.com state that bad credit is accepted provided that you have a guarantor with good credit history or a homeowner. Some of the lenders we work with say that they do not offer loans to those who have experienced bankruptcy, IVAs or CCJs – however, they are some lenders like SUCO that do.
Missing repayment will make your credit score go down
By missing a repayment from your guarantor loan, the information will still be fed back to the credit reference agencies and this will cause your credit score to decrease. This update to your credit file will make it harder to get credit elsewhere, so it is important to plan how you are going to make repayment each month.
If you cannot keep up with your repayments, you may set up an arrangement or pay plan with the lender to reduce the amount repayable each month and extend your loan. However, this will also be noted on your credit file and will be available to lenders running future credit checks on your account. For more information, read our guide on what happens if you cannot repay.
How a credit score works
A credit score is a numerical value that is calculated to represent your current financial situation and considers:
-Your payment history (35%)
-Types of credit (10%)
-New credit (10%)
-Length of credit history (15%)
-Amount owed/debt (30%)
Everyone gets a credit score as soon as they turn 18 years old and as soon as you start taking out credit cards and loans, it begins to change.
Credit scores are divided into five categories; very poor (0 – 560), poor (561 – 720), fair (721 – 880), good (881 – 960) and excellent (961 – 999). By repaying loans on time and avoiding defaults, the higher your credit score will be. But if you miss several repayments and have a lot of debt outstanding, your score will likely fall.
The good thing about credit scores is that they can always go up and down, based on your current financial circumstances. So if you have historically had a bad credit rating but you are starting to get your finances in order and a better income, your score can always improve.
How to get a good credit score
Since 35% of your credit score is based on your repayment history, it is essential to keep up with any credit cards and loans that you have. With 30% of your score based on amount owed, you do not want to borrow beyond your means; otherwise you will struggle to keep up with the repayments. For example, taking out lots of loans or credit cards at a time.
Other factors include the types of credit that you get (10%) as applying for payday loans might make you seem financially stretched and desperate for short term finance.
It is also important to avoid making too many applications within a short space of time. Every time you apply for a loan or credit card, a footprint is added to your credit file to show that a creditor or loan provider has looked at your account. It is normal to have around 12 footprints per year and although they disappear after 12 months, having too many can make you seem desperate to potential lenders.
One of most basic things you can do to boost your credit score is to join the electoral roll. By confirming your name and address with the local authorities, it adds credibility to future loan providers that you are a real person with a real address.
How you can check your credit report
There are several tools online that you can use to check your credit score. So you can monitor your progress if you are using a guarantor loan to improve your credit score.
Some companies offer free trials so you can see how the reports look, otherwise it costs just a few pounds a month and you can receive regular notifications by email and text if anything happens to your credit file. It is also a good way to check for potential fraud on your account because you will always be notified if a loan or credit card application has been made in your name.