Can Short Term Loans Help To Improve Your Credit Score?

You might be one of the many people in the UK who have a bad credit score. According to statistics, more than one in three are rejected for loans because of their poor credit rating and those in their twenties are the most likely to have a bad credit rating.

A hand holding £20 notes

Being turned down for loans isn’t the only problem you’ll face when you have bad credit. Some employers regularly complete a credit check on potential employees. A bad score could mean you’re rejected for your dream job.

To improve your credit score, you might look at a short term loan. However, do short term loans help improve a credit score?

What is your credit score?

Your credit score is an indication of the likelihood that you can meet your financial commitments. It is used as a prediction of whether you can pay back the loan and your bills. It isn’t just the amount you’ve paid back either, its whether you’ve made payments by the set deadlines. If you’ve made one late payment, this could negatively impact your score.

A credit report concept

When you have a good credit score, you’ve demonstrated in the past that you can repay your debts by the time and amounts set out in credit agreements. In contrast, a lot of things can lower your credit score. You could have missed previous payments, been late with a payment, taken out too much credit in the past, or made multiple applications for credit in a short space of time.

Statistics show that five million people last year were rejected for credit because they’ve made too many loan applications. So while any loan you take will impact your credit rating, it is not taking credit that will improve your credit score. Instead, it is how reliable you are at making repayments that might improve your score.

Of course, it gets a little complicated because you don’t just have one credit score. Lenders, credit reference agencies and other companies calculate their own score based on their preferred methods and criteria. Some will raise your score slightly less by if you have multiple loans instead of one large loan. This is regardless of whether you’ve made all the repayments.

So, while repaying a short-term loan might raise your credit score, the actual impact will be different depending on the company.

Ensuring a short term loan will improve your credit score

Every person has a ‘credit file’. When you apply for or take out a loan, the action is recorded on your credit file. When you make a payment, whether it is on-time or late, it is also recorded on your credit file.

A payday loans concept

If you want a short-term loan to improve your credit score, then you must ensure you’re going to meet your financial responsibilities. This means making payments to your lenders on time and completing the repayments of your loans in full and on time. So carefully read the payment conditions of the short-term loan you’re applying for. Know exactly how much you’re expected to pay and when. If you can commit to these amounts, and meet all the deadlines, you will show that you are a reliable borrower. This might help to improve your credit score.

What are the benefits of improving your credit score?

Improving your credit score can make it a lot easier to borrow in the future. In most cases, with a better credit score, you can benefit from higher amounts of credit and better interest on that credit. This will make it cheaper to borrow in the future and you can often go to other borrowers who offer more favourable terms.

However, it is important not to think you can just take out a short-term loan to improve your credit score. To potentially increase your credit rating, you must make all repayments in full and on time.

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