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This month, we’re tackling a question that comes up quite a lot from our readers: will a guarantor loan improve my credit rating?
Guarantor loans are increasingly popular as a way to help people with poor or less-than-perfect credit scores borrow money at a good rate and start rebuilding their credit scores. But lots of people wonder “can guarantor loans improve my credit rating?” or are they just more debt?
And the answer to this question is complicated. Technically, taking out a guarantor loan won’t help you improve your credit rating.
But making regular repayments will.
And that’s where you can use a guarantor loan to really improve your credit rating. You can use a guarantor loan to get access to better rates and improve your chances of being approved for a loan that, by the time you’ve finished paying it off, will give you a record of responsible spending and a healthier credit score.
How will guarantor loans improve my credit rating?
Guarantor loans can improve your credit rating by helping improve the repayment history portion of your credit file.
If all this talk of credit scores is already getting a bit confusing, take 2 minutes and check out this great video by Mashable (featuring comedian Kal Penn):
You see, because your repayment history makes up around 35% of your credit score, making regular payments can really help turn your credit score around quickly.
All of the recent entries in your credit file demonstrate timely payments and financial responsibility, which are great things for improving your credit rating and making you seem like a safer bet.
But there is a downside, if you’re not careful: missing a payment can have a HUGE effect on your credit score, causing it to drop each time you miss a payment.
That’s why it’s crucial to make sure you can afford the repayments. Missed payments don’t just affect your credit score, but they can have an effect on your guarantor’s credit score too, if they can’t pay your debt.
Will guarantor loans improve my credit rating if I already have good credit?
Technically, yes, a guarantor loan would help improve your credit rating, even if you already have a good credit score.
But most guarantor loans are designed for people with fair or poor credit so they get access to better rates and cheaper loans while reducing the risk for the lender.
If you’ve already got good credit, you’re probably better off applying for a good credit loan that you’d qualify for.
Will guarantor loans improve my credit rating if I already have a lot of debt?
If you checked out the Mashable video, you’ll know that the second biggest factor for your credit score is credit utilisation (the amount you owe) which means that if you’re taking out a guarantor loan but you already have a lot of other debt, whether in the form of credit cards or other loans, you might do your credit score more harm than good.
However, if you’re using a guarantor loan as a debt consolidation loan — where you borrow money to pay off all of your debts and reduce them to one monthly, manageable payment — then this can help repair your credit score by making it much easier to stay on top of your loan and hit those all-important regular repayments, all without increasing your credit utilisation.
Will guarantor loans improve my credit rating if I have no credit history?
Yes! When you have no credit history at all, it can be hard to get approved for any kind of borrowing.
However, a guarantor loan can help improve your credit rating by giving you access to affordable loans that you can use to make monthly repayments, improve your credit utilisation and start building a credit history, which are all fantastic things for your credit score.
In conclusion, a guarantor loan is a great way of improving your credit rating by making regular repayments or paying off your expensive debts, but — like any debt — it’ll only help if it’s manageable and affordable.
If you’re thinking about a guarantor loan to repair your credit score, then why not see how much you can borrow (and how much you’ll have to repay) with our free eligibility calculator?
- Author The Bamboo Team
- Posted 13 June 2019