Building Your Credit Through Personal Loans
The majority of Americans find it difficult to do without financial assistance from banks, especially if they want to get a new home or car. To avoid an unexpected rejection after applying for a loan, you need to monitor your own credit history, paying special attention to your credit score.
Why you need to improve your credit history
Good credit history is required to get loans from banks. If you have a poor credit history, it is more difficult to borrow money. Banks either reject the application or offer loans on unfavorable terms. You will not be able to get a large loan or mortgage with a low financial rating.
Also, credit history is often checked by employers when hiring an employee. This is especially important for people involved in finance or responsibility for material assets. Banks and microfinance institutions believe that bad credit history indicates the inability of clients to properly manage their own money, and debts can push a person to commit illegal actions.
What factors affect the credit score?
The credit score depends primarily on the following indicators:
- Timely fulfillment of the loan obligations;
- The total loan period, that is, the period of use of bank loans by the borrower: the longer the period, the higher the degree of trust;
- Frequency of applying for financial assistance. If you have applied for loans many times, you create an image of a person who is constantly in need of money due to the fact that you do not know how to live within your budget;
- The amount of current debt in relation to the level of income. Over-indebtedness will not allow you to get a new loan;
- Types of loans-financial groups are more likely to trust customers who use different banking products.
Are personal loans reflected in credit history?
The answer is quite simple: yes, they are reflected in the credit history. Any MFI (microfinance institution) is obliged to enter the relevant information in the Credit History Bureau. Otherwise, an institution will not get the right to conduct its activities in the state. Thus, all the actions of each client are carefully recorded and entered into the database.
How do personal loans affect your credit history?
There are both positive and negative effects of personal loans on credit history. The positive thing is that you can improve your history with the help of loans. For example, you may not be given loans from banks due to previously committed delinquencies. In such a situation, you will not be able to improve your history with the help of the bank. MFIs (microfinance institutions) are less scrupulous in such matters and are ready to lend to almost everyone. As a result, you can take out several personal loans one after the other and repay them in a timely manner. As a result, you build your credit history.
The opposite is also true. So, for example, if you delay payment, information about this gets into the Credit History Bureau. Before providing a loan, the bank studies the client’s history and makes a final decision based on what it sees. If you delayed payments earlier, the probability of loan approval decreases dramatically.
Which MFIs partner with the Credit History Bureau?
All of them. Any microfinance organization is obliged to cooperate with the Credit History Bureau. Otherwise, it will simply lose its license and it will not be able to continue its activities. Thus, when applying to any MFI, you should take into account that the data on the loan issue is immediately transferred into the Credit History Bureau. This applies both to those organizations that have their own branches in different cities, and those that work only via the Internet. If the company is engaged in lending, it is obliged to transmit data to the Credit History Bureau. There are no exceptions.
Which MFIs do not transmit data to the Credit History Bureau?
There are no such MFIs. More precisely, if some MFI claims that it does not transmit data to the Credit History Bureau, this is either an advertising deception or a direct fraud. The deception will consist in the fact that information about the client, his/her loan, delay, and so on will still get into the Credit History Bureau. And if the company does not transmit data to the Credit History Bureau, it means it works without a license. As a result, it can cause a lot of problems, such as huge interest or additional payments. Such companies do not operate for a long time, they are quickly identified and closed, but the probability of getting to such a fraudster still exists. It is recommended to request information about the license or simply contact those MFIs that have been on the market for many years or at least months.
Do small personal loans build credit?
Yes, they do. But how can I build credit with small loans?
To get a build your credit loan, you need to:
- Apply to any MFI that has the appropriate license;
- Apply for a small personal loan for a relatively short period (up to 1 month);
- Pay off the debt timely, without allowing a single minute of delay;
- This information gets into the Credit History Bureau within 5 days and will make the client’s credit history more positive. If necessary, this procedure can be repeated several times. In some cases, it is simply impossible to get a loan from a bank without such a loan. For example, banks, unlike MFIs, do not like to provide loans to individuals who do not have any credit history. It is wrongly assumed that the absence of history is a good thing. In fact, the bank wants to understand who it gives money to.
What else can I do to rebuild my credit?
Restoring a financial rating takes a lot of time and effort. In addition to taking a personal loan, you can use other methods to build credit.
Correction of erroneous data
Credit history often deteriorates as a result of mistakes made by bank employees. This may be an incorrect spelling of the name, inaccuracies in the ID data, or a technical failure when updating information about the repaid debt. In this case, you must submit a written request to restore the credit history. On average, it takes up to 14 days to adjust the data in the Credit History Bureau.
Repaymet of current loans or refinancing
It is not possible to increase the credit score if you have outstanding debts. The payment of all loans will have a positive impact on credit history. You should not hide from creditors. It is recommended that you contact the bank and ask for debt restructuring.
If you have many loans from various organizations, it is recommended to act as follows:
- First of all, it is necessary to repay small personal loans from MFIs and credit card debts. This should be done to avoid charging large interest and large penalties;
- Try to achieve a restructuring of the remaining part of the debt. Even if the bank rejects such a request, you will have documents confirming that you have made efforts to resolve the problem;
- Try to reduce the amount of regular payments. With long delays, the amount of penalties will make up most of the debt. A competent lawyer can challenge the penalty imposed by the lender.
Get a credit card
You can improve your credit score by using credit cards. You need to actively use the bank’s borrowed money for several months, without going beyond the established limit. Debts should be paid off carefully during the grace period. These records will be added to the credit history, which will have a beneficial effect on the overall financial rating of the borrower.
Buy goods on credit or by installments
Stores offer more loyal terms to the customer than banks. This can be used to correct credit history. You will need to purchase goods on credit or by installments directly through the seller. This method is effective if the client’s reputation is slightly damaged. In situations where the credit score is bad, the store will not approve the transaction.
A smaller number of queries
Information about loan denials is transmitted to the Credit History Bureau. The abundance of negative responses may alert the bank. If it turns out that you have recently repeatedly applied to various organizations and received a refusal everywhere, the decision will not be made in favor of the borrower.
Opening a deposit
To increase the chances of loan approval, you can apply for a salary card and open a deposit with a financial company. Banks put forward more lenient requirements for their clients. In this case, insurance in case of non-repayment of the debt will be the funds placed on the deposit or the salary transferred to the client’s account.
Justification of financial difficulties
If you have a difficult life situation and need money, it is necessary to collect a set of documents. These can be disability certificates, extracts from the medical records.
A guarantor with a good credit history
Citizens who have attracted guarantors with a good credit history can increase the chances of loan approval. In this way, banks minimize their risks. If the terms of the contract are violated by the main borrower, the burden on loan repayment falls on the persons who acted as guarantors.
Improving your reputation for a particular bank
A gradual improvement in the reputation for a particular bank gives good results. To do this, you need to actively use its products. You can open a bank account, get a credit card or additional insurance. This has a positive effect on credit history. But you should not expect stunning results immediately.
Repayment of non-bank debts
To improve your credit history and increase the likelihood of loan approval, it is necessary to pay off not only delinquencies in financial companies. It is necessary to pay off the existing unpaid fines from the traffic police, debts on alimony, housing and communal services.
What if I can’t improve my credit score?
The process of improving a credit score can take a long time. If any company offers paid services and promises a quick result, we can confidently say that these are scammers. Such organizations should be avoided.
If the score is badly damaged, no quick methods will give a result. Dodgers who systematically violate loan terms fall into the blacklist. Access to loans for such citizens is blocked, but there are still ways to get a personal loan in this case.
If your credit history is damaged, you can use the following methods:
- Wait until your credit history data storage expires. This may take 7-10 years. This option is suitable for those who do not plan to take out loans in the foreseeable future. For this reason, the method will not suit everyone;
- Contact a credit broker-intermediary who helps you get money in debt for a fee. The borrower fills out an application and enters into a contract. Based on the search results, the broker will provide the client with a list of legal entities and individuals. Disadvantages are additional costs for commissions to the intermediary, a high risk of running into scammers because this area of activity is poorly regulated by law;
- Get a loan with material security. You can use a car, real estate, antiques and jewelry as collateral. If you have collateral, banks will give you a loan even if you have bad credit. However, if you violate the contract, the rights to the property pass to the creditor. This method is suitable if you are sure you will be able to repay the debt, otherwise, you may lose the car or apartment;
- Find a private investor through friends or on thematic resources on the Internet. The transaction must be registered with a notary. It is recommended to consult lawyers before entering into a contract in order to avoid unfavorable credit conditions for the borrower.
Tags: credit, credit score, personal loans