08 Nov Can Guarantor Loans Improve Your Credit Score?
Yes, it is definitely possible to improve your credit score through a guarantor loan, provided you pay it back on time and do not miss payments.
In fact, many people struggling with a bad credit score (or alternatively, no credit history at all) take out a guarantor loan to improve their credit. It can be a great way to demonstrate creditworthiness and every positive repayment is recorded by the UK’s credit reference agencies who will increase your credit score each time.
What is a guarantor loan?
This is when a loan is co-signed by a nominated guarantor (typically a trusted friend or family member) who enters a legal obligation to pay the loan back if the main applicant cannot pay. In most cases, people who apply for a guarantor are struggling with no credit history or poor credit, finding it difficult to get access to a loan from a traditional lender.
A guarantor ensures creditworthiness up front, helping the loan to be approved. During the term of the loan the main applicant has a chance to demonstrate whether they are creditworthy too, by making prompt loan repayments.
How credit scoring works
Every person has a credit score which is based on how well you have managed credit previously. This includes repayments for things such as payday loans, mortgages, credit cards and bills. The more evidence of paying credit back fully and on-time, the higher your score will be.
Scores are calculated by the three main credit reference agencies in the UK (Equifax, Experian and Callcredit) and below is an example from Experian.
0-560: Very poor
It is worth remembering that even if your score is currently low, it can go up or down depending on how you act with credit in the future. If you have a good credit score already, remember that in order to consolidate this score you must continue paying loans back on time.
However, it may take some time to gradually improve your score if you rank very poorly on the credit score scale.
What else affects my credit score?
Your credit score is determined not just be your loan repayment history. Other factors are taken into consideration such as
- How many applications you have made recently
- How many outstanding loans you have
- Duration of these outstanding loans
Whenever you apply with a lender, guarantor loans or not, these criteria are looked at. Each application for a loan will usually involve a credit check which leaves a ‘footprint’ on your file.
What is a credit footprint?
A credit footprint refers to the check carried out on you and your guarantor to determine whether to approve you for a loan. The footprint verifies that a lender has checked your account.
Usually a ‘hard’ credit footprint will last for 12 months on your file. Meanwhile, a ‘soft’ credit footprint does not show up on your file. It is up to the lender which type of check they choose.
Keep in mind that having many credit footprints on file within a short space of time could hinder your ability to get access to further credit since it could make your look needy or desperate for funds.
How can I improve my credit score?
Paying back your guarantor loan promptly is not the only way you can help to improve your score. Here are other things you can do to maintain or rebuild your score.
- Remove financial associations from those with bad credit: if you have old joint accounts with an ex-partner with bad credit, close it down. Being financially associated with someone who has bad credit can affect yours too.
- Pay all bills on time: it is not only loan repayments that affect your overall score
- Make sure you are on the electoral roll: this provides the lender proof of your identity and address which increases your chances of being accepted for a loan. You can sign up here.
- Check your credit file regularly: keeping yourself updated with any changes to your credit file is important for rebuilding or maintaining your credit score. It also allows you to check for any errors and correct them.
- Avoid making too many loan applications at once: as previously stated, this not only leaves hard credit footprints on file but also suggests to the lender you may be financially stretched.
For more information, read our guide on how to improve your credit score.