Credit scores are an Achilles’ heel for most borrowers as they largely determine the kind of loans you qualify for. While borrowing credit can be cumbersome with bad credit, there are inclusive loan options available. This is reassuring if you need a loan even with bad credit, and are worried about your options being limited.
However, you ought to study your bad credit loan options carefully to make an informed choice. This includes being discerning about the lender you choose, as the right lender can make all the difference between a smooth borrowing experience and a stressful one. Why is this so important, you might ask?
The answer lies in the impact bad credit loans can have on your credit score. Although there are a lot of determining factors, the right lender and loan type play consequential roles.
In this article, we carry out a reality check on the true impact of bad credit loans on your credit score.
First, the Good News
As a borrower with bad credit, you surely don’t want to be dabbling in any financial arrangements that even remotely affect your credit negatively. So, if you’re asking if bad credit loans impact your credit score negatively, the straight answer is ‘no’. But there are nuances to this answer that are worth bearing in mind.
Borrowing credit comes with a few thumb rules. This includes borrowing only the amount you need, not missing payments, and using your credit responsibly on a need-to-need basis. Doing this ensures you build your payment history slowly, which positively impacts your credit score as it’s a key component of credit reports.
How else do bad credit loans help your credit score? Credit report agencies consider diversification of credit an important part of responsible credit management. This is also something lenders appreciate and encourage borrowers to do. If you take a bad credit loan for consolidating debt, you score brownie points as it reduces your credit utilisation score considerably.
Where You Need to Tread with Caution
If you’re a seasoned borrower, you know that each loan application you make comes with a credit check. If you’re new to borrowing, this is well worth keeping in mind. These credit checks are part of routine loan application assessments by lenders and are nothing to worry about.
However, when borrowing with bad credit, you’ll need to steer clear of loans with hard credit checks. This is because hard credit checks accompany most loans that come with high lending risks. These hardline enquiries leave a mark on your credit report and can impact your credit score negatively.
Additionally, missing a payment on a bad credit loan is reported to credit bureaus and is generally frowned upon by lenders. This can harm your credit score further, which makes planning for timely loan repayments an absolute must.
The Solution to Avoid Negative Impact and Boost Your Credit Score
If you’re in the market to borrow a bad credit loan, these pointers can help you make the right choice and avoid negatively impacting your credit score. These are tried and tested, expert-recommended tips that can help limit credit damage while still accessing funds to meet your financial needs.
1. Study Your Credit Options
With fintech services today, borrowers can make informed decisions about their credit options with modern loan comparison tools. This gives you a chance to filter out loans that are upfront about loan costs, offer transparent terms and conditions and have reasonable interest rates.
2. Borrow Only What You Need
This is a handy borrowing tip, especially for those who resort to borrowing credit regularly. By borrowing only the amount you need, you limit your financial burden through loan repayments and avoid the risk of missed payments. This will keep your credit utilisation score at a healthy level and prevent damaging your credit score.
3. Choose the Right Lender
By choosing lenders who report your payments to credit bureaus, you ensure that your payment history is being recorded. This helps build up your credit history, positively impacting your credit score. For a safer borrowing option, consider choosing inclusive and ethical lenders like Salad, who specifically tailor their credit offerings to suit those with bad credit.
To Sum Up
Borrowing a loan is always going to impact your credit score depending on various factors, such as the loan type, the duration of the loan, timely payments and more. These factors also apply to bad credit loans, which are no exception.
However, if you’re worried about a bad credit loan impacting your credit score, you needn’t be. As long as you’re following all the basics of responsible borrowing, you should be able to keep your credit score damage-free.
The key to a healthy credit score is not limiting your borrowing but managing your credit wisely. Doing this can help you access better credit options in the future.
We hope this deep dive into the impact of bad credit loans on your credit score has helped you.
