A credit score speaks volumes about your financial behaviour and serves as the basis for consumer lending decisions. In order to obtain affordable deals, your credit score must be up to scratch. A poor credit report insinuates your struggle with payments in the past.

Traditional financial institutions do not follow as flexible lending practices as direct lenders. An impaired credit rating and improper documentation eventuate in disapprobation. Fortunately, online lenders fill this void to assist subprime borrowers to tide over during emergencies.

Bad credit direct lender loans in the UK come with high interest rates. There is no fixed interest rate that you will be charged because it depends on how poor your credit score is and how risky a borrower you are perceived. The higher the risk, the higher the interest rate will be. Caution is enjoined when it comes to borrowing money despite a less-than-perfect credit rating.

Loans with poor credit are widely popular among people as they are deemed to ameliorate your credit rating. Those whose credit file is “thin” could also benefit from these loans. Is it true that poor credit loans build your credit rating? If so, how?

These claims are overhyped

Bad credit loans are aimed at subprime borrowers who are refused elsewhere. As the risk of default is too high, high interest rates are charged. These loans are mainly aimed at helping people with small emergencies, and hence, the offered sum of money is exiguous. However, there are some lenders who lend a larger amount of money to be paid down over a period of a year.

Small emergency loans are paltry and discharged in fell one swoop. In most cases, the repayment length does not last beyond a month. Such loans cannot help improve your credit score because the whole amount is paid off in one go. It does not reveal much information about your credibility and commitment.

Lenders particularly want to see whether you manage to make payments over an extended period. You can demonstrate your prowess only if the debt is to be paid over an extended period of time. For instance, if a debt is to be paid back over 12 months, there is a possibility that you come across some unexpected expenses or face changes in your financial circumstances. If you keep payments in the face of unexpected financial challenges, it clearly indicates that you are a committed borrower.

Therefore, credit score improvement is linked to instalment bad credit loans. Small loans are paid off in fell one swoop, and, hence they do not help build your credit rating. Small loans worth £1,000 or less are not reported to credit reference agencies even if you repay them on time, but defaults will be reported, which means your credit score will drop.

A good credit score does not just depend on timely payments

Instalment of poor credit loans will certainly assist with improving your credit score, provided you discharge them on time, but it is worth noting that this is not the only determinant of your credit score. There are several other factors that have a direct and indirect impact on your credit report.

• A credit utilisation ratio

It does not feel problematic when you are paying off your credit card balance on time. Unfortunately, your credit card balance has a direct impact on your credit rating. If you carry a balance when reporting it to credit bureaus, you will see a plummet in your credit score.

Ideally, a credit utilisation ratio is recommended 30%, but you should aim for 20%. The lower the balance, the better it is. You are recommended to clear your dues within the grace period, but make sure that you discharge the balance before your credit card provider informs credit reference agencies of your balance.

If you have old credit cards that you do not use, do not make the mistake of closing them. Closing old accounts will dramatically increase your credit utilisation ratio. For instance, if you have three cards, each of them comes with a £1,000 limit. You use only two credit cards, and their balances are £500 and £400. Now the credit utilisation ratio is 30%. However, if you close the unused card, your credit utilisation ratio will sharply increase from 30% to 45%.

This plays a paramount role in deciding your credit rating, so be mindful while opening or closing a new credit card.

• A type of credit mix

Another factor that directly affects your credit score is the type of credit mix. If your credit report shows the same kinds of loans, your credit score will be low. This is because you should demonstrate the ability to handle different types of loans. Most of the people’s credit files manifest only small emergency loans. Even though you pay them off on time, they cannot suggest your potential to tackle instalment loans and credit card debt.

It is vital to have different types of credit on your credit file. You should consider taking out a credit builder loan as well. These loans are instalment loans and paid back in six months. Small emergency loans, credit builder loans, and credit cards would help you significantly build your credit rating. However, it does not mean that you will borrow money without any reason.

• Length of credit history

The length of your credit history also affects your credit rating. The longer the history, the better it is. The average age of your accounts will be determined, and based on that, your credit rating will be determined. If you have no credit history, you should try to build it by taking out a credit builder loan. However, recent credits will not help you much.

To sum up

Bad credit loans could help improve your credit history only when they are paid down over a period of time, provided you pay them off on time. However, payment history is not the only factor that improves your credit rating. You need to focus on other factors as well, such as a credit mix, a length of credit history, and a credit utilisation ratio.