Can a secured loan help build credit score?
Written by Robert Bester, Consumer Finance Expert Robert has been a writer for six years, specialising in consumer finance and the UK lending market. Concentrating on consumer credit products, Robert writes informative articles that help customers manage their personal finances efficiently.
23rd November 2020
3 minute read
If you would like to borrow money but have a bad credit score, one way to get around it is taking out a secured loan. As long as you can comfortably afford to make repayments, you might find this will satisfy your borrowing needs and improve your credit score at the same time.
We’ve put together some information that might be useful if you’re thinking of taking out a secured loan, especially if you are worried about the affect that borrowing can have on your existing credit score.
How can a loan impact my credit score?
- It can improve your score if you pay it off in full and on time
- It can damage your score if you miss payments or pay late
- It can damage your score if you apply for a loan and are rejected
- Your score can decrease when you have a high loan balance
- Your score can decrease if you have a high debt-to-income ratio
Borrowing money will always affect your credit score. However, it depends on whether you can stick to the agreed repayment schedule as to whether your credit score will go up or down.
Making every single payment will make you more creditworthy, as you are proving you can manage debt and pay it off easily, meaning your credit score will go up. On the other hand, if you miss multiple payments or make payments late, you are showing you are less creditworthy and subsequently, your credit score will go down.
You might even find that applying for a loan will affect your credit score, especially in the case of a rejection. This is why you should always use an eligibility checker such as moneymatcher first, instead of applying and being rejected multiple times. Read our article on checking your eligibility when applying for credit for more information.
Having a high loan balance is where you have just taken out a loan and the amount you owe is the highest it can be, meaning that you have a large debt to repay. At this point your credit score might decrease as you already have a lot to repay, but when you start making repayments this will slowly creep back up again.
In addition, if you already have multiple debts you need to pay off, and therefore use a large portion of your income having to pay them off every month, your debt-to-income ratio will be high and you will be seen as less creditworthy.
How can a secured loan build my credit score?
You will find that if you can make repayments on time and in full, you will be rewarded with an improvement in your credit score. Making timely loan payments is crucial, especially with a secured loan, given that failure to repay can result in your home being repossessed.
This is why it’s so important to plan ahead and make sure you can definitely afford to repay a secured loan from the start. Using an eligibility checker such as moneymatcher will help you find an appropriate secured loan that you will be fine to pay back over a long period. The more likely you are to make timely payments, the better chance you have of improving your credit score.
You can read more about taking steps to improve your credit score here.
How else can I improve my credit score?
If you’re more inclined to improve your credit score than you are to borrow money, you might want to consider a credit builder loan instead of a secured loan.
- Make monthly payments with an amount chosen by you
- Normally over the course of 12 months
- You can’t access the money you’re paying until the end of the loan agreement
- At the end you should receive the money back in full
A credit builder loan works by allowing you to make monthly payments with an amount chosen by you. This amount gets put into an account you can’t access until the end of the loan period, where the funds are usually released back to you. By following the repayment schedule, you will not only make improvements to your credit score but also save money over the course of a year.
You can also try a credit builder credit card, which will give you a small balance to spend every month. As long as you can return the balance to £0 by the end of the month and not overspend, you will make gradual improvements to your credit score.
Start comparing secured loans
Are you still keen on taking out a secured loan? Check your eligibility using our moneymatcher tool to narrow down your search without affecting your credit score. You can also take a look at our secured loan options using the link below. Good luck!