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Budget and the Bees: 4 Ways an Unsecured Loan Helps Repair Bad Credit

May 24, 2018 by Susan Paige

Having bad credit is never fun. Many times, it is not directly your fault. Medical bills, unexpected life events, the loss of a job, and more can put you in a financial hole and make keeping up with your credit card payments and other bills difficult. Maybe you have even had to declare bankruptcy.

Never fear. All is not lost. Your credit, like many other things, can be repaired with time and some effort on your part. You might have to start slowly depending on your financial situation, and you can do a few different things to get your credit back on track again. One of these is to take out a personal loan. This type of loan is unsecured and will show that you will pay back debts in a timely manner despite the things that have happened in your past.

Here are four ways an unsecured loan helps repair bad credit.

It Shows You Can Still Qualify

The unfortunate thing about personal loans for those with bad credit is that the terms will not be as favorable as they would be if you had good credit. However, just getting approved for the loan shows other lenders that you can still qualify to borrow. As long as the loan is not from a short-term, predatory lender, it will be good for your credit.

At the same time be careful of online lenders and others. Read terms carefully, and make sure you are not getting into more debt than you can handle. Don’t borrow more than you can afford to pay back, so examine your budget carefully before taking out any loan.  

It Shows You Can Pay Things Back on Time

One of the keys to rebuilding your credit is to show that your circumstances have improved and that you can pay things back on time. Taking out a personal loan and making all your payments on time or early shows that you have this ability and you are more financially stable.

Be careful about paying the loan back too quickly though. You do need to show that you will pay things back over time, and simply taking out the loan and paying it back immediately does not build this type of history. One strategy is to leave the money to pay back the loan in the bank and pay the loan back out of those funds one payment at a time.

The key is never to default on a personal loan, especially when you are already struggling with poor credit.

It Shows You Value Your Credit Score

When you have struggled with credit it is easy to get discouraged and just avoid all kind of credit. The problem with that is while you are no longer creating negative credit for yourself, you are also not building positive credit. This makes it difficult for your credit score to recover.

The reason is if you have revolving debt, whether that debt is secured or unsecured, it shows that you can make payments, like mentioned above, and shows you are financially stable and responsible. Experts will tell you that having no credit is almost as bad as having negative credit events. To build your score, you will need to have active accounts as well.

This means that even when you pay off old credit cards, don’t close them out, but instead keep them, and use them infrequently. This also adds age to your credit score, an important factor in determining your credit worthiness.

It Shows You are Willing to Put Forth Effort

Avoiding credit or simply avoiding debt collectors and refusing to pay your bills is always going to hurt your credit. It also shows a certain apathy on your part. Trying to fix your credit means taking risks regardless of how poorly things have gone for you in the past. Lenders like to see activity and movement on your part in an attempt to positively change things.

The thing in, one successful loan can lead to another, and once your credit score improves, the terms will improve as well. This will give you even more access to credit.

Bonus: Go Slowly

Here is the important thing to remember; your credit did not get bad overnight, and it will not get fixed overnight either. It will take time, and if you try to rush things you are likely to make things worse rather than better. Here are some tips:

Don’t Apply for too Many Offers: Every time someone does a credit check on you, it impacts your credit score. Don’t apply just because you get an offer in the mail. Instead, only apply for credit you can use responsibly and that has the terms you can live with. Don’t rush into credit just because it is available.

Make wise purchases, ones that are needs, not wants. Don’t charge vacations and other extras unless you can pay them off right away. Pay off one loan at a time and get one card at a time. This will help you build your credit wisely and keep a solid foundation.

An unsecured loan can help you repair your bad credit when coupled with a few other steps. Just be sure to use credit the right way and make your payments on time. Your credit score and your financial future will thank you.

 

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