Credit score improvement becomes a do-or-die situation at times. A poor credit score will not get in your way while applying for a small emergency loan. Still, it becomes a reason for turning you down when you apply for a mortgage. If somehow you manage to get the nod, you will end up with very high interest rates. A mortgage is a long-term debt that ties you with payments for more than a decade. The chances of falling into debt are quite high.
Of course, it makes sense to do up your credit rating before officially putting in the mortgage application. Many people prefer guarantor loans as a way to improve their credit rating, but it can be a horrible idea to do so.
Here is a real scenario.
Sara had some debts, including credit card bills. She had been keeping up with payments until she lost her job. Sara did not have enough savings to keep the ball rolling. Despite receiving unemployment benefits, she had been struggling to keep the wolf from the door. As a result, she missed her payment, which resulted in a default that was recorded on her credit report.
But things took a turn for the better. Sara married Alex and landed a new job. Then, she decided to be back in the driving seat and improve her credit score. Consolidation was one obvious way to get out of a pile of debt, but she could not qualify for that because of her poor credit.
Then, she learned about guarantor loans, which were advertised as a better alternative. She was up for the idea that she could use guarantor loans to settle her outstanding debts, and her husband, Alex, would be her guarantor. She was also told that her poor credit file did not matter then.
So why these loans are not a good alternative?
Guarantor loans are extremely expensive
It can be excruciating to pay off guarantor loans. Suppose you took out a £3,000 loan for three years with an annual interest rate of 50%. Your monthly payment will be £162.34, and the total interest you will be paying is £2844.24.
If you compare these loans with unsecured loans, you will find that you can get them at 12% interest. However, because your credit rating has been poor, so you will get them at 22%. In that case, you will be saving £1,719.72.
Look at the following table:
| Loan amount | £3,000 |
| Annual rate | 22% |
| Loan term | 3 years |
| Monthly payment | £114.57 |
| Total interest payable | £1,124.52 |
| Amount payable | £4,124 |
Not only will you be saving money in total interest payable, but the size of monthly instalments will also be lower. Even if you face the ups and downs in your financial situation, you can manage the payments.
What if they are cheaper than the existing interest you are paying?
It is likely that you owe payday loans, and they carry very high interest rates, up to 292%. Of course, it sounds like a good idea to use guarantor loans to settle them once and for all because they are available at 50% annual rates.
The fact is that it is not a good idea at all. The way out of the payday loan debt trap is to make affordability complaints. If a lender is found that they lent you money overlooking your struggle with payments, interest will be waived on your current available balance.
However, if your fault is found that you avoided giving true information, you will not be eligible to get your money back.
What are the most affordable alternatives to improve your credit score?
Before you think of improving your credit score, you need to figure out a way to settle your debts. Instead of using guarantor loans, you should try to use a non-guarantor loan. If you do not need a large sum of money, no guarantor loans with no credit check can come in handy.
Here, no credit check does not insinuate that you will be lent money without any credit checks at all. Lenders will conduct soft inquiries, and they do not appear on your credit file, so you will not see a further dip in your credit score.
As far as it is about the damage to your credit points, you should consider the following steps:
- Let it be as it is
It is vital to repay your outstanding debts, but repaying them cannot improve your credit score. Your credit score will not change with the fact that when your defaulted debt is paid off in full or whether you paid it off slowly or fast.
Once a missed payment has been recorded in your credit report, it is not going to be out the window until six years despite the full settlement.
Time is the best help in such cases.
The damaging effects of your defaulted debts will be less intense after a couple of years. Moreover, once the debt is removed from your credit report after six years, you will not have to face the music.
- Speed up with the improvement of a credit card builder or bad credit card
Once you have settled your defaulted debt, you should take a break from borrowing money. Try to put a gap of at least a year, and then you can start borrowing a small sum of money and paying on time. It will help build your positive payment record. You can use a credit card and pay off the balance in full. This way, you can avoid paying interest on your credit card bills.
Some lenders allow credit cards with instalment payment plans. Consider if you are eligible for them. These credit cards will help you pay down the balance in fixed instalments. Normally, the repayment term does not exceed six months. Lenders will trust you more when you show them that you manage payments over an extended time period.
Choose a credit builder loan if instalment credit cards are not available. These loans have been exclusively designed to help boost the credit rating of subprime borrowers. You will be required to pay down the debt using fixed monthly instalments. Because your credit rating is already poor, you will have to pay very high interest rates.
- Use Experian Boost
Experian Boost gives you a unique way to ameliorate your credit points. It tracks your regular spending, such as council tax payments, OTT subscriptions, utility bill payments, and more. If you make all your payments on time, you will get an instant boost in your credit points.
With the help of Experian Boost, you can make those payments count in determining your credit score, which you would not otherwise. The effort of regular budgeting will pay you off. Bear in mind that after the perusal of your financial situation it will be checked if there is a scope for boost. Moreover, not all payments are boost-worthy.
The bottom line
Guarantor loans are exorbitant. They can further push you into the deep hole of debt. You should consider other alternatives, such as no guarantor loans, credit builder loans, and credit cards, to build your credit rating. By making on-time payments, you cannot remove your old defaults and credit inquiries, but you can create a positive payment history.