Are Short-Term Loans Good For Your Credit Rating?

Guide to Short-term loans and your credit report.

Knowing whether to take out a short-term loan can be a confusing situation to be in, which often comes with lots of questions. In this article, we have answered whether short-term loans are good for your credit rating or not.

Short-term loans can be good for your credit rating but, as with all credit, this is only true if you make your repayments on time and settle your loan in full by the agreed date. If you fail to make your repayments and don’t get in touch straight away to discuss your change of circumstance with your lender, your credit rating will be negatively impacted, and a record will be kept on your file for 6 years. Only take out a short-term loan when you really need to, and only if you can definitely afford the repayments.

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You may still have questions about the application process, repayment process or whether a short-term loan is right for you. Our team of financial experts at The Money Shop is on hand to answer any questions you might have and support you with making the right financial decision for your personal circumstances.

Your questions, answered

It doesn’t matter who you are or what you do – every adult in the UK has a credit file, which is made up of data around your borrowing history and information from credit reference agencies. Your credit file carries with it a credit rating, which is a score lenders use to determine your creditworthiness and ability to make responsible lending decisions. The higher your credit rating is, the more likely you are to be approved for credit, like loans or a credit card.

You have the power to impact your own credit score, both positively and negatively. This means that by doing the right things, you can improve it and increase your creditworthiness. But likewise, you can also bring your credit rating down by doing the wrong things.

As you go through life borrowing money, the lenders you use will work with credit reference agencies and update them on your account. In turn, the credit reference agencies will update your credit file. The information they add to your file stays on there for 6 years, so it is very important to keep your future in mind when applying for credit as your activity can impact applications you want to make further down the line. This might include important loans, such as a mortgage or a large personal loan.

Your credit rating and file are available for you to look at and review; you should check in regularly to make sure the information held is correct. You can also use it to see how to improve your borrowing habits. It can sometimes take a month for the credit reference agencies to update your file, so the information can occasionally be outdated for a short period.

Every once in a while, applying for some form of credit is necessary. For example, if your washing machine breaks and you have work clothes and school uniforms that need washing – this would be classed as a financial emergency, especially if you’d exhausted all other options of help from your savings, or friends and family. However, it’s important to act responsibly and only take out credit when you really need it.

When you apply for a short-term loan or any other type of credit, the lender will check your creditworthiness and affordability by performing a search on your credit file. Most lenders will do a soft search first and only complete a hard search one you are ready to complete your loan. You can still be declined after a hard search, however, so it is important to be open and honest in your application. Other lenders can see hard searches that you’ve made for credit so, if you’re declined by one lender after they do a hard search, it is a good idea to wait a while before applying elsewhere.

If you apply for credit and you’re approved, the hard search will show on your credit file along with an ‘open’ status against your loan. This will remain until you repay your loan in full. Taking out a loan will have no negative impact on your credit file and rating if you make the agreed repayments on time, in line with your payment schedule.

Problems arise when you begin to miss repayments and don’t reach out to your creditor to arrange an alternative agreement regarding your payments. It’s really important to contact your lender as soon as you think you might need to miss a repayment. Ignoring the situation is the worst thing you can do. When you miss a repayment, your credit file will be updated to ‘overdue’, which other lenders can see. It shows them that you’ve failed to meet your agreed responsibilities. When left overdue for some time, your lender may record a Default on your file. A Default is a red flag to future creditors and will stay on your credit file for 6 years, so it’s important to avoid getting to the Default stage if you can.

Contacting your lender to discuss your change in circumstances can feel daunting and stressful, but they will want to resolve the situation just as much as you do. They will work with you to arrange a fair resolution that you’re both happy with. After all, having an overdue and unpaid loan on their books isn’t great for business either. They might be able to offer you a temporarily reduced payment plan to help with the situation. Whatever you do, don’t put off getting in touch with them as soon as you can.

Short-term loans can help to boost your credit rating if you meet the repayments and settle your loan on time. It shows future lenders that you are trustworthy and can meet your financial responsibilities, as agreed.

Make sure that you shop around for the best short-term loan interest rates and agreement terms as this can help you to find a loan that is more affordable and potentially flexible. Set calendar or smartphone reminders for your repayment dates, and amounts, so that you’re never caught short and miss a repayment. Use this information to create a monthly budget of all of your bills and expenditures so that you can factor your repayment into your outgoings for the month.

Your repayment date should coincide with your pay date, so that the repayment can be taken as soon as you have the funds. Your lender will collect your repayment using a continuous payment authority, which is a process you agree to when applying. It means they have the authority to take the repayments from your bank account on the dates agreed; all you need to do as the borrower is have the funds available. Easy!

Short-term loans can be a way of building up your credit rating when paid on time and settled in full. Their positive impact on your credit file will boost your score for future borrowing so that lenders view your applications favourably and are more likely to say yes.

If you’ve decided to go ahead with applying for a short-term loan and are committed to repaying it on time and protecting your credit score, it’s time to find a lender. You can do this on a laptop, desktop computer or on your smartphone.

Have to hand information about yourself, your employment status and your income. You may be asked for information about where you’ve lived, your monthly outgoings, including bills and living expenses, and bank account information.

The next step is where the lender performs a soft-search, which doesn’t effect your credit file. If they believe that there is a high chance of you being accepted for a loan they will provide you with a quote. On accepting this quote your lender checks your credit file and affordability, as described above. If your short-term loan is approved, the funds can be in your bank account within 24 hours. They’re paid directly into your account electronically, making the whole process very fast and smooth.