Can bad credit loans improve your credit score? The short and simple answer is yes, bad credit loans can improve your credit score. Having said that, there are three areas that you need to consider to get the most benefit from using bad credit loans as a method to improve your credit.
How to Improve Your Credit Score with a Bad Credit Loan
There are three conditions you need to meet to improve your credit score with bad credit loans. If you don’t meet these conditions then you are wasting your time and money.
1.) Make sure you pay on time – Most any loan you receive will be an installment loan. That means you will make monthly payments. Before you apply for a bad credit loan to improve your credit score, make sure you have the money in your budget to make the payments on time each and every month. One late payment and you will undo any good you might have gained.
2.) Pay more than required – Most bad credit loans will have a fixed interest rate. That means you will pay the same amount every month over the term of the loan. However, if you want to improve your credit rating, then you need to pay more than the required payment. It doesn’t have to be a lot more, but it should be more than the minimum. For example, if your monthly payment is $100, consider paying a $125 each month.
3.) Get your balance below 30 percent – Credit rating agencies use many factors to determine your credit score. One of them is how much you owe in relation to how much credit you have available. This means it is best to keep how much you owe lower than 30 percent of how much credit you have available.
For example, if you get a bad credit loan for $1,000 you would want to get the balance of what you owe to under $300 as soon as possible. This combined with the making your payments on time and paying extra ever month will give you the biggest boost to your credit score.
Another thing to keep in mind is that if you use bad credit loans to consolidate debt, that alone can help improve your credit score. This goes back to the percentage of available credit to the total amount of debt.
For example, if you have three credit cards that you own a total of $5,000 on with a total credit limit of $5,000 your debt to available credit is 100 percent. However, if you get a loan for $5,000 and use it to pay off all of your credit cards, you will now have $10,000 of available credit and only $5,000 worth of debt which immediately takes your overall debt to available credit percentage to 50 percent.
As you pay off your loan, that percent will continue to fall, and your credit score will start to rise. Of course, this means you need to keep your credit card balances at zero or you won’t see any improvement in your credit score.
It is always wise to weight the pros and cons of bad credit loans before you apply for one, but with at little forethought and careful planning, they can help improve your credit score over the long run.
This information was brought to you by BetterLoanChoice
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