installment loan bad credit uk
Personal Loans

Do Instalment Loans Build Your Credit Rating?

Posted by

When we need the money and we’re thinking about applying for a loan, one of the first things that come into our mind is our credit rating. So many people worry needlessly about their credit rating because, as we’ll show you in this article, your credit report (which gives you your credit rating) contains a lot of information which lenders interpret in different ways. A lot of people don’t know either that your credit rating is only a part of the decision-making process that a lender uses to come up with a decision on your instalment loan application.

In this article, the Oyster Loan teams look at:

What’s on your credit report?

Your credit report contains a lot of information including:

  • your address history
  • the current accounts you have with your bank (including overdraft), loans, store cards, credit cards, and some non-financial companies (like Sky, your mobile phone provider, and so on)
  • how much credit you have available to you (your limits)
  • how large the balance on your loans, credit cards, store cards, and overdrafts are
  • how many times companies have performed “hard searches” on your credit account.

There are three different credit reference agencies – Equifax, Experian, and CallCredit. Each credit reference weighs up all the information they have on you and they produce a credit score unique and individual to you and your financial history.

Your actual credit score is then affected by the following:

  • whether you meet your repayments and bills on time and in full (it works in your favour every time you successfully make repayment and against you when you miss one)
  • how much of your credit limits you’re using (for example, if you have £20,000 credit across your loans, credit cards, store cards, and overdrafts and you’re using £18,000 of that, this will give you a lower credit score than if you were only using £5,000 of it)

Your credit score is updated every month as all of the companies which contribute information to your report send your latest account details.

It is true that the higher your credit score, the better chance you have of getting an instalment loan. However, it’s not the only factor. If you have a great credit score but very little money left at the end of a month to repay an instalment on a loan, you might be viewed less favourably than someone with a not-so-good credit card who has a lot of money left after their monthly expenses.

Instalment loans credit rating advantages

Just because a credit score is not the be-all-and-end-all determining whether your application for an instalment loan, that doesn’t mean that you shouldn’t try to improve it.

You can build your credit rating by taking out an instalment loan and making the repayments on time and in full. To lenders, that shows that you can manage your money well and that you’re not living beyond your means. Even better, the more you demonstrate how well you can manage money by making the repayment dates agreed between you and your lender, the better chance you have of getting lower interest rates on later loans you take out.

There are two types of instalment loans popular with people who have bad credit – payday loans and short-term loans. A payday loan is an instalment loan with only one repayment date – a short-term loan is an instalment loan when you borrow money for up to 12 months.

Instalment loans credit rating disadvantages

Because credit building loans like short-term instalment loans for bad credit are considered by many lenders to be higher risk, you will probably end up paying higher interest rates than the loan offers that you would receive if your credit score was higher.

The increased level of risk is also reflected in the fact that you can’t borrow as much money on an instalment loan for bad credit applicants than you can on, for example, a long-term loan for good credit applicants.

You won’t be able to borrow as much and you’ll pay more for what you borrow if you have a low credit score. However, as we mentioned earlier, taking out instalment loans for bad credit and making all of the repayments on the due dates works in your favour and it can unlock the door to more and cheaper loans later on.

What else should I do to improve my credit rating?

The best ways to build your credit rating in a hurry are:

  • make sure that your address history is correct
  • companies do make mistakes on people’s credit reports so, if you spot one, ask the credit reference agencies to make the necessary corrections
  • make sure you continue to meet all the repayments that you’ve agreed to make on your loans, credit cards, store cards, and overdrafts and don’t fall behind on bills to companies like Sky, Virgin Media, your mobile phone company, and your utility company
  • where possible, pay down debt so that your overall balance across all of your loans, credit cards, store cards, and overdrafts is as low as possible compared to your available credit limits.

Whatever your credit rating, how can Oyster Loan help?

Oyster Loan, a Financial Conduct Authority-licensed credit broker, works with a unique panel of innovative and open-minded lenders, all of which are also Financial Conduct Authority-licensed for your peace of mind. The payday instalment loans and short-term instalment loans we offer you our bad credit applicant clients enjoy additional protections including a cap on the level of interest and fees you pay.

Once we have your details, we submit them together with your credit report and credit score to the lenders who, from our knowledge and experience, are the most likely to accept your loan application. Once we have received all of their offers back, we then present you with the very best deal we’ve found.

If you’re happy to proceed, please read the terms and conditions to make sure that you’re happy with those too. If you are, please sign the online documentation to open your loan account. At this point, you’ll have a direct relationship with your lender.