How does a secured loan affect my credit score?

A secured loan is a form of borrowing that is secured against your property. Like other forms of borrowing, providing you maintain your repayments on time, every time, you can build up your credit score. But if you don’t manage to keep up with these payments, your credit score will be affected and your property may be at risk.

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How a secured loan can help your credit score: 

  • You can build up a good payment history if you maintain your loan repayments on time, every time. This will boost your credit score in the long run.
  • Taking out a homeowner loan could help you to consolidate your debts, potentially combining multiple debts into one. This could reduce your credit utilisation ratio in the case of credit cards, thus boosting your credit score. Instalment loans don’t count towards your credit utilisation ratio. Your credit utilisation is the amount of debt you have compared to your available credit limit.
  • Debt consolidation can also reduce your monthly payments, meaning you may find it easier to manage your money. This could mean you’re less likely to miss or be late with payments, which will then improve your credit score over time.

But remember, if you consolidate your existing borrowing, you may be extending the term and increasing the amount you repay in total.

How a secured loan can bring your credit score down: 

  • If you cannot afford to maintain your loan repayments, this can have a negative impact on your credit score. Missed and late payments stay on your credit file for six years.

  • A hard credit check is normally carried out on your credit report when you apply for credit. This can cause a temporary dip in your credit score. Try not to make multiple applications for credit in a short space of time, as doing so will harm your credit score and give lenders the impression that you are in financial difficulty. 

What is a credit check?

A credit check is a process typically used by lenders to review your credit history. This is usually carried out to assess your eligibility for finance on a product or service, though it can be checked in other circumstances, such as by a prospective employer. It is done by accessing your credit report, which provides an insight into how you have managed financial agreements in the past.  

These checks come in the form of both ‘soft’ and ‘hard’ searches.  

A soft search involves an initial check of your report, which can be used to verify your details and view your credit score. Soft searches can also be conducted by yourself if you choose to access your own credit report.  

Importantly, a soft search is only visible to you, and does not affect your credit score. 

A hard search is a thorough look at the specifics of your report and gives prospective lenders and other providers a detailed view of how you’ve managed your finances previously. An application for credit will result in a hard search being completed.  

Unlike a soft search, hard searches are visible to others when checking your report. Too many of them in a short space of time could indicate desperation to obtain credit, and can reduce your credit score.

Why do lenders do credit checks? 

When considering whether to lend you money, a lender needs to have confidence that you are who you claim to be, and that you have the ability to pay back any borrowing as agreed. To do this, they will access your credit report to verify your details, and search your financial history to decide if this is the case.

What do lenders look at on my credit report? 

To verify your details, lenders will confirm your name and address from your credit report, and may also check your electoral register status for proof of residency. 

They’ll then assess your financial background to see if you have had missed payments, defaults, CCJs, or been declared bankrupt. These can remain on your account for a number of years, but as time passes, some become less detrimental. 

Lenders will also be able to see how many lines of credit you have open and how much of your available credit limit you are using, to check you’re not too reliant on credit. 

In addition, lenders may check if you have any financial links to others. For example, if you have a joint account with someone else who has bad credit, it could negatively impact your loan application by association. You can remove any old ties by contacting the relevant credit reference agency, as long as the account in question is closed. 

Is a secured loan a good idea if I have bad credit? 

If you have bad credit, it may still be possible to take out a secured loan. But whether or not it’s a good idea depends on your own circumstances and affordability. 

You need to weigh up the pros and cons and make sure you can afford to repay the loan every month for the full duration. Remember to factor in extra outgoings (like emergency repairs, for example) to make sure you would still be able to afford the repayments if your circumstances changed in the future. 

Some lenders and brokers specialise in finding finance for those with poor credit histories. And some lenders may feel more comfortable lending to someone who has a lot of equity in their property - despite having a bad credit history. From the lender’s point of view, this may offset some of the risk involved in lending to someone with bad credit. 

This is because a secured loan is secured against your property. So, if you cannot afford to repay it, your home could be repossessed.

Other ways to improve your credit score

To improve your chances of being accepted for a loan, you can take steps to improve your credit score. You can check your credit history for free with tools like CredAbility, as well as the three main credit reference agencies, Experian, Equifax and TransUnion.

It can take time to improve your credit score, but there are several things you can do boost it, including: 

  • Get on the electoral roll - Make sure you’ve registered to vote, as this can boost your credit score and it only takes five minutes online. It shows the credit reference agencies that you have a stable address, which makes you appear like a more reliable applicant to lenders.
  • Maintain your repayments - Maintaining all of your bill repayments on time, every time, shows lenders that you are a responsible borrower. Consider setting up Direct Debits or calendar reminders so you never miss a payment.
  • Use savings to pay off your debts - It might be worth using your savings to pay off any debts. You could be charged more interest on your debts than you’d gain in a savings account. But this depends on your own circumstances and whether you’d prefer to keep your money to one side in case of an emergency. 
  • Don’t make too many applications at once - Each time you apply for credit, a hard credit check is carried out which leaves a footprint on your report. If you do this too many times in a short period, it can affect your credit score. It can also make you look risky to lenders, as it could give them the impression that you are desperate for credit and are struggling financially. Waiting months between credit applications could help to prevent this.
  • Correct any mistakes - Having incorrect details on your credit report could have an impact on your ability to get credit, as the data won’t match up with your credit application, which could put future lenders off. Make sure you contact the lender or credit reference agency involved to ask them to correct any errors for you.
  • Remove old financial ties - If you’ve ever taken out joint finances with someone, this will show up on your credit report. Make sure you remove any old ties so that your score isn’t damaged by association. You can do this by requesting a ‘Notice of Disassociation’ from the credit reference agencies.
  • Use eligibility checkers before applying - This is a ‘soft search’ tool used before you apply for credit to check how likely you are to be accepted. It doesn’t affect your credit score, so you can use as many checkers as you like to find the best deal. 
  • Borrow less - If you manage your budget well and borrow less, this will show lenders that you are a reliable borrower – and you are more likely to maintain a good credit rating.
  • Increase your monthly payments towards credit cards – If possible, this should have a positive impact on your credit score because you won’t have any missed payments and you will also reduce your credit utilisation. 

Read our helpful guides to learn more about loans.

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