If you need better credit and aren’t willing to hand over a deposit for something like a secured credit card, bad credit loans can provide an alternative means of getting where you need to be. This can go badly if you’re not careful, though. If you take care to avoid the 4 things we advise against and do the 4 things recommend instead, you’ll have the best chance of having a positive experience with this endeavour.
Don’t: Go Overboard
When you’re taking out bad credit loans primarily for credit building purposes, it’s important to be careful not to opt for loans that are too large. You need to borrow, but you don’t need to borrow in excessive amounts. There are even more dangers to doing this than you might expect – while the obvious problem is that you’ll be paying more than you need to in interest if you do, the bigger issue is that you may accidentally create a more serious debt issue for yourself than you intended to.
Getting your hands on too much money at once could present an irresistible temptation to spend it, even if that means spending it in frivolous ways that you might not choose if you didn’t have all those dollars on your hands. Buying something that you don’t really need is just as damaging to your finances when trying to pull off a strategy like this as it would be in any other circumstances.
Do: Borrow Small, Manageable Amounts
Instead of getting bad credit loans that are as big as you can possibly get, take the conservative approach and choose small loans that you can use to buy small things you really need. Not only will this help to keep you from overspending, but it might actually be healthier for your credit score overall. Your credit utilization ratio (the amount of credit you routinely use at any one time as compared to the full amount that is available to you) is an important factor that goes into determining your credit score, and lower is actually better. This guideline technically only applies to credit cards and lines of credit, but it has implications for bad credit loans too. You almost never want to borrow anywhere near as much money as your approved limit would technically allow you to do. Remember, having a good credit score is about being responsible as a borrower, and taking out massive loans rarely looks good in those terms. Just a little will go a long way in this endeavour.
Don’t: Pay Everything Off Immediately
Taking out a loan for credit building purposes isn’t a race. You usually have nothing to lose by getting ahead of the game with your loan payments and beating your repayment date by as much time as you can manage, since this will allow you to save quite a bit on interest and reduce the overall cost of your loan. However, things don’t work like that when getting the money isn’t your primary objective. This plan hinges on having your lender report your good credit behaviour to the appropriate parties so your credit score will go up. If you pay everything off in a hurry, there is less activity for your loan provider to report to the credit bureaus, and thus less of an impact on your credit score. This isn’t a big concern for people in a stable credit situation, but since you are ostensibly borrowing almost entirely to take advantage of that positive credit impact, that delay is going to matter to you. You don’t want to undermine the entire point of your efforts simply by being overeager.
Do: Draw Things Out a Little
Even if you have the money to pay everything back right away, try to resist that impulse. Yes, you’ll save money the faster that you pay things off, but you’ll also lose out on the chance to benefit from a longer credit history the sooner you end your loan. Loans that are quickly resolved don’t count for nearly as much as loans that are paid consistently over longer lengths of time. Of course, you don’t want to be paying more money than you absolutely have to, so you should be trying to pay down the principal at an accelerated pace if you can. The trick is to reduce your debt just enough to make your monthly payments small and your interest owing as minimal possible. Wipe out most of your debt, but keep a little around just to keep the loan active and useful to you. If you really want to repay the full amount early, you can, but try to limit yourself to shaving off a few months at most.
Don’t: Just Assume You Know How Much Progress You’re Making
When you’ve carefully planned out how to achieve better credit by borrowing, it’s easy to assume that everything is going as planned and that you’re on track to achieve your credit goals without ever actually looking at your credit report. After all, why wouldn’t your plans be working out? There’s no reason to think that they wouldn’t be after all the research you’ve done.
Unfortunately, reality doesn’t always work out like you’d expect. You never know what might be going on with your credit score when you leave it unobserved. For all you know, your credit score may not have budged at all in spite of all your efforts. This is an unlikely scenario, but the fact remains that it is incredibly difficult to gauge the exact pace of credit improvement without any concrete evidence to go on. The credit bureaus don’t know what you’re trying to do and they don’t care about any single person’s credit journey anyway, so you can’t expect them to magically provide you with updates on your progress. You have to go out and find those things yourself.
Do: Keep An Eye On Your Credit Score
Instead of staying blind to any potential problems in your credit score’s improvement trajectory, take an active approach and actually monitor your score over the time in which you are working to make improvements. Getting access to your credit score is no longer difficult and there is no excuse for not checking in when you’re working toward a better score like this. There are many websites and institutions out there that will show you what your current credit score is, and almost all of them are free. Many will even provide you with updates on a monthly basis. Being able to check in this often as you move forward in this journey is a huge advantage because it allows you to see the impact of your efforts as you go. Not only can you use this to see what does and does not work, but you can also keep yourself motivated by observing the real-time effects of what you’re doing. Without this visible proof to show you that changes are in fact happening, it’s easy to fall into despair and assume that you’re paying tons of money for your bad credit loans for no real purpose. When you know that’s not the case, you have all the more reason to stick with the plan and hold out until the end.
Don’t: Stick With Bad Credit Loans Indefinitely
Bad credit loans are a great way to get started on improving your credit, but it isn’t equally useful over time. You chose those types of loans at the outset because they were all you could get, even knowing that they were a compromise due to their high level of expense. That may not be the case as time goes on. An improved credit score may mean that you can access better options to keep building your credit as you go. If you never deviate from your original plan, you could end up paying far more than you need to over time.
Do: Inquire About Other Credit-Building Options
This is one more reason why it is important to monitor your credit. Once it has started to recover and reaches passable levels, you’ll have many more options available to you in terms of reaching your credit score goals. Many of them will be much cheaper than opting to stick with bad credit loans over the entire process. Look into your options for lower-rate loans or even a credit card if you can get it. Ideally, you’ll be able to get access to some sort of line of credit so you’ll never have to pay interest fees again – provided that you pay off your balance on time, of course.
Get Bad Credit Loans the Easy Way
Knowing how to handle bad credit loans in a credit rebuilding scenario is a valuable skill that may make it possible for you to overcome some significant financial issues in your life. Armed with that knowledge, all you need now is an actual loan. Our partner lenders have a multitude of offers for bad credit loans just waiting for you to apply for them. Pick out the one you want, and in just minutes that money can be yours and you can be on your way to a better life.