Did you know about 68 million credit-active Americans have poor or bad credit?
Having bad or poor credit can deprive you of better options in terms of loans and other privileges. You may not be able to get a car, get into college, or pay off medical bills on time.
People within this bracket are in search of methods and ways to improve their standing. Some folks try riskier methods, like pawning important items or tinkering with their mortgage. These tactics may do more harm than good.
One better solution to use a personal loan to build credit.
Not sure how getting a loan to build credit works? Don’t worry, we’ve got it handled for you. Read on below to explore the use of small loans to build credit as well as financial practices to improve your credit standing.
Understanding Your Credit Score
In understanding the method to build credit back up, let us look at the definition of a credit score and what comprises it.
The FICO score, created by the Fair Isaac Corporation, is the most commonly referred system for credit scoring. This uses the information from the credit reports produced by the three credit bureaus. These are Experian, TransUnion, and Equifax.
The grading is on a scale from 300 to 850. If your credit score 650 and below, it will reflect badly on you. Most people have scores of 750 and above. What determines this score are the following details.
Do loans build credit?
Yes, they do and it all boils down to your payment history. This contributes to your credit score at an estimate of 35%. By paying your bills on time, you should be able to pull your score up and lenders will love you for it.
The amounts you owed contributes at an estimate of 30%. This spans across all your credit cards and loans. It also takes note of cards’ credit limit and the amount used for the account.
Credit History Length is another fact at 15% estimate. To put simply, a long history of borrowing responsibly will boost your score.
Two other factors have an estimate of 10% contribution each to your score. First, any inquiries you made for new credit within the past two years comes to play.
Where it checks if you are too desperate for more credit. The other is the credit mix of the types that you use, like personal loans and the like.
Actions involving these factors can impact your credit score positively or negatively. Missing payments, or late ones, can damage your credit score in a significant amount.
Credit Score vs Credit History
There is a difference between these two terms despite denoting related information about you and your financial capability.
The credit score pertains to the numerical value calculated from your information. While connected to your credit history, it details your credit risk and financial behavior. The details and standing change according to the factors mentioned earlier.
Your credit history is another factor, also known as a credit report. Compared to the credit score (provided by FICO), a credit report compiles the information from the three credit bureaus. You can request for a rundown of your credit history for free to see where you stand.
This details your financial reliability as it puts into full detail records on your payment history with debts and bills. The credit report is usually requested by companies when applying for a new account.
One thing of note about these reports is that the reports they hold differ from each other despite each bureau maintaining one credit report on each person. It can exist on its own while a credit score derives its information from the three reports.
They need both these metrics as it will impact you with your transactions. These metrics can affect you in availing for loans and credit cards, especially when they reflect negatively on you.
This also causes increased interest rates on your payments, not only in your bills. For instance, utility companies will charge a security deposit.
Bad credit also affects your chance to get decent housing, or even start up any business endeavors. In the long run, it will make your life difficult if it continues.
How Do You Raise The Score?
By knowing these factors, there are various ways that you can raise your credit score. So far, the most effective solution in hand is with paying your bills on time, since these transactions are also reported, noting of your progress and improving your standing as you go.
You can use a new account in a good way, where you can start fresh. However, this also needs that you practice credit habits that will not damage your credit standing and history.
There are other methods that we can explore to help you improve your credit score.
Among which include the use of small loans to build credit, including payday loans and bad credit personal loans.
What are Payday Loans Anyway?
These are small, short-term cash loans that are typically borrowed to get a faster and easier access to money.
The agreement to this cash loan is that the settlement comes with interest on their next payday. The advantage to this is how it is easy and accessible. This makes it a great small loan to build credit credibility.
Payday loans for bad credit are an option taken for those who need to go for a loan but are unable to do so due to bad credit. It doesn’t require a credit check to see if you qualify. Instead, it requires these two particular details to avail of them.
To qualify for a payday loan, you need a proof of your employment. This ensures that you can pay the loan in full once the period for it ends. Paying the loan in full and on time ensures that you gain its benefits without encountering problems.
Otherwise, the problem might increase due to the interest rate.
There are other payday loan services that are rather predatory about this. We offer clear-cut conditions to help you with your credit to turn around your situation.
Can Payday Loans Affect Your Credit Score?
Normally, payday loan history is not looked into by Equifax, TransUnion, or Experian. Thus, they do not affect your credit score at most. However, there are instances that payday loan history is also looked into by other credit history agencies.
In fact, in those instances that these agencies report on your payday loan history and you have not made your payment, these can impact your score further that would cause them to send debt collectors after you.
On the other hand, making your payments in time should ensure that you not only you settle the loan, the payment gets reported and it reflects on your credit score and improves it.
Lenders also look into the borrower’s credit report to see if they are capable of paying, especially if it involves an unsecured loan. Thus, paying in time can also reflect if the lending agency sends the report about it, affecting the credit standing.
Can payday loans help and build a bad credit score back in shape? The answer is both yes and no. No, in the sense that these are not normally looked into by the three credit bureaus.
Yes, as it is possible to rebuild your credit score with payday loans, but this will take a lot of time to completely accomplish.
How to Use Payday Loans to Improve Your Credit Score
While using payday loans on its own can be time-consuming and may not work on its own, you can use this as a stepping stone to improve your credit and build from there.
One measure that you can utilize this is to aid you in paying off other debts that have high interest or priority. This allows you to make use of one debt to help pay off another. Usually, a payday loan is likely used as a buffer or an addition to help pay off the bill or debt that needs your attention.
One thing that you should avoid is using the payday loan to buy things. It is the worst way to make use of such money and it may only cause problems in doing so.
Another practice to take note when making a payday loan is to consider the repayment for the loan. Look ahead and see if you can afford to repay the amount with interest and fees in one lump sum by the end of the term. Going more than you can afford may cause you additional problems financially.
Also, when checking on the details and offers carried by the payday loan, check with the lender about options and terms on how to settle the payment.
Use a Personal Loan to Build Credit Today!
While it is a temporary measure, a payday loan can prove useful as a stepping stone in improving your bad credit score.
On its own, it will take time, but you can use a personal loan to build credit. It can prove to bring the needed results when pressed for time while waiting for your paycheck to arrive.
Account for what you need and take note of the repayment before going for one. To prepare for short-term loans, you can check this post to know how to get started with short-term loans.