If you’re struggling with a poor credit rating, you might wonder whether taking out a loan could actually help rather than harm your score. The answer isn’t straightforward, but in many cases, a well-managed loan can become a stepping stone toward rebuilding your credit profile.
How credit scoring works in the UK
Before examining how loans affect your credit score, it’s worth understanding what makes up your credit rating. UK credit reference agencies like Experian, Equifax and TransUnion evaluate several factors:
- Your history of making payments on time
- The percentage of available credit you’re using
- The length of your credit history
- The types of credit you have
- Recent applications for credit
Lenders want to see that you can handle different types of credit responsibly over time. This is where loans can potentially help your credit score—but only when used correctly.
How the right loan can improve your score
Diversifying your credit mix
Credit scoring models favour consumers who successfully manage different types of credit. If you only have credit cards, adding a personal loan to your profile creates a more diverse credit mix. This diversity can positively impact your score by demonstrating you can handle various credit responsibilities.
Establishing payment history
Your payment history typically accounts for the largest portion of your credit score. Each on-time loan payment you make adds another positive entry to your credit file. Over time, these consistent, positive records can significantly improve your score, particularly if you previously had missed payments or defaults.
Reducing credit utilisation
If you use a loan to pay off credit card debt, you could see an immediate improvement in your score. This works by reducing your credit utilisation ratio—the percentage of available credit you’re using. For example, if you have £5,000 in credit card debt with a £10,000 limit (50% utilisation) and use a loan to clear this balance, your utilisation drops to 0%, which credit scoring models view very favourably.
Creating a positive credit history
For those with limited or no credit history, taking out a small loan and repaying it as agreed can help establish a positive credit record. This proves to future lenders that you’re a responsible borrower.
When loans might hurt your score
While loans can help improve your credit score, there are circumstances where they might cause damage:
Multiple applications in a short period
Each time you apply for credit, a hard search is recorded on your file. Too many of these in a short timeframe signals financial distress to lenders and can lower your score. Using a broker like Bad Credit Loans can help avoid this, as we conduct an initial soft search that doesn’t impact your score before matching you with suitable lenders.
Missing repayments
Late or missed payments can seriously damage your credit score and remain on your file for up to six years. Only take out a loan if you’re confident you can make all repayments on time.
Taking on unmanageable debt
If a loan pushes your debt-to-income ratio too high, it could affect your ability to make payments, potentially leading to defaults that severely impact your score.
Types of loans that can help rebuild credit
Short-term loans
For those with poor credit, short-term loans can be a manageable way to demonstrate responsible borrowing. Their shorter repayment periods mean you can build positive payment history relatively quickly, though interest rates are typically higher.
Credit builder loans
Some lenders offer specific “credit builder” products designed for people with damaged credit histories. These typically feature smaller amounts and structured repayment plans specifically intended to help establish positive payment records.
Secured loans
If your credit is severely damaged, secured loans (backed by collateral) might be more accessible and offer more favourable terms. Making regular payments on these loans can help rebuild your credit profile, though they carry the risk of asset loss if you default.
Best practices for using loans to improve credit
If you’re considering using a loan to help rebuild your credit score, follow these guidelines:
- Always make payments on time – Set up direct debits to ensure you never miss a payment
- Borrow only what you need – Resist the temptation to take more than necessary
- Check your credit report regularly – Monitor your progress and address any errors
- Don’t apply for multiple loans – Use a broker like Bad Credit Loans to find the right option first time
- Create a repayment plan – Ensure the loan fits comfortably within your budget
- Be patient – Credit improvement takes time, with consistent responsible behaviour
The Bad Credit Loans approach
At Bad Credit Loans, we specialise in connecting people with damaged credit histories to lenders who can help. Our panel includes many lenders who report to credit reference agencies, meaning your responsible repayment behaviour will be recorded and can contribute to improving your score.
Our application process uses an initial soft search to match you with suitable lenders, protecting your credit score from unnecessary hard searches. This approach allows you to use loans strategically as part of your credit rebuilding journey, rather than causing further damage through rejected applications.
The bigger picture
While loans can help improve your credit score when used responsibly, they should be part of a broader credit rebuilding strategy that includes:
- Paying all bills on time
- Keeping credit card balances low
- Limiting applications for new credit
- Maintaining older credit accounts
- Regularly checking your credit report for errors
Remember that credit improvement is a marathon, not a sprint. Consistent responsible behaviour over time will yield the best results.
Final thoughts
Used wisely, loans can indeed help improve your credit score by diversifying your credit mix, establishing positive payment history, and potentially reducing your overall credit utilisation. However, success depends on your ability to manage the loan responsibly and make all payments on time.
If you’re considering using a loan for poor credit to help rebuild your credit, visit Bad Credit Loans today. Our experienced team can help match you with lenders suited to your circumstances, potentially putting you on the path to an improved credit score and better financial options in the future.