Peronal Loan and credit rating

andythelyonhart

Hello folks,
I'm considering taking out a personal loan to diversify my credit and thereby improve my credit score. Because I have existing funds, I'm flexible with amount I borrow, but I'm wondering whether borrowing higher amount (and of course settling the debt) will improve my credit score more than borrowing a smaller amount. Does the amount borrowed matter, when it comes to how settling a personal loan may or may not affect your credit score?
Thanks all, Andy     

Brie

Why do you need a loan?  If you don't need one for a particular purpose I wouldn't suggest taking one out.  Why pay a bank interest when you don't need to.

A credit score is a fiction but your credit history is important and that's what any bank etc will look at when they are considering offering your credit.  

Is there something else that could be done to make your credit history look more positive?  Registered to vote?  Got too many credit cards and so too much credit available?

GrumpyDil

As above, don't take a loan out just to improve your mythical credit score. 

fatbelly

andythelyonhart said:

Hello folks,
I'm considering taking out a personal loan to diversify my credit and thereby improve my credit score. Because I have existing funds, I'm flexible with amount I borrow, but I'm wondering whether borrowing higher amount (and of course settling the debt) will improve my credit score more than borrowing a smaller amount. Does the amount borrowed matter, when it comes to how settling a personal loan may or may not affect your credit score?
Thanks all, Andy     

So you're taking out a loan in order to improve a made-up number?

If you're determined to take out credit for no good reason, why not go through Quidco/Topcashback and get a £25 sweetener for taking out a new credit card. That way you actually get paid and don't have to use it

andythelyonhart

Thank you. I'm looking to purchase a new car, which I could afford to buy with my own funds. My credit score is something like 730/999 due to one missed credit card payment back in July 2020. So I'm doing various things to help improve it over time. I only have one credit card so there is little for the credit agencies to go on in terms of assessing my credit history. So, it's not the credit score in and of itself I'm worried about, but making sure I'm improving the visible credit history for the future for when I would like to secure a mortgage. I've done the obvious things like being registered to vote, etc. But having more 'settled credit' is one of the ways the agencies recommend I need to improve my score. As I'm making a large purchase I thought it would be a good opportunity to take out a loan for this reason, but to pay it back really early (thereby minimising the interest payable) but hopefully maximising the good effects for my credit score. 

andythelyonhart

fatbelly said:

andythelyonhart said:

Hello folks,
I'm considering taking out a personal loan to diversify my credit and thereby improve my credit score. Because I have existing funds, I'm flexible with amount I borrow, but I'm wondering whether borrowing higher amount (and of course settling the debt) will improve my credit score more than borrowing a smaller amount. Does the amount borrowed matter, when it comes to how settling a personal loan may or may not affect your credit score?
Thanks all, Andy     

So you're taking out a loan in order to improve a made-up number?

If you're determined to take out credit for no good reason, why not go through Quidco/Topcashback and get a £25 sweetener for taking out a new credit card. That way you actually get paid and don't have to use it

I've been led to believe that I need to diversify my credit. In other words, I already have a credit card and a mobile phone contract, so I need something different, i.e. something like a personal loan. Also, I've been led to believe I need something more substantial than a small credit card or phone bill balance to demonstrate my creditworthiness. I intend to pay the loan off quickly so that the interest will be minimal and I'd write that off as worth paying if it improves my credit history.  

th081

How much is the credit limit on your existing credit card. With only one card you have a low number I would have thought it would be better to get another card than get a loan that you pay back quickly. The missed payment 4 years ago will be having limited impact on your score. 

fatbelly

andythelyonhart said:

I've been led to believe that I need to diversify my credit. In other words, I already have a credit card and a mobile phone contract, so I need something different, i.e. something like a personal loan. Also, I've been led to believe I need something more substantial than a small credit card or phone bill balance to demonstrate my creditworthiness. I intend to pay the loan off quickly so that the interest will be minimal and I'd write that off as worth paying if it improves my credit history.  

Well that's untrue.

There's no point taking out unnecessary credit

Jami74

andythelyonhart said:

So, it's not the credit score in and of itself I'm worried about, but making sure I'm improving the visible credit history for the future for when I would like to secure a mortgage. I've done the obvious things like being registered to vote, etc. But having more 'settled credit' is one of the ways the agencies recommend I need to improve my score. As I'm making a large purchase I thought it would be a good opportunity to take out a loan for this reason, but to pay it back really early (thereby minimising the interest payable) but hopefully maximising the good effects for my credit score. 

I don't know how the mortgage algorithms work, but taking out a large loan and then paying it back a few days later to avoid interest doesn't really demonstrate that you can handle credit well, just that you requested credit and then changed your mind about needing it. Maybe a second credit card that you put a few regular purchases on and pay off in full by direct debit? Things like phone contracts and broadband should also show up on credit files, if you haven't got a phone contract in your name already you can get cheap SIM only ones.

andythelyonhart

th081 said:

How much is the credit limit on your existing credit card. With only one card you have a low number I would have thought it would be better to get another card than get a loan that you pay back quickly. The missed payment 4 years ago will be having limited impact on your score. 

Current credit limit on my AMEX is c. £9k though I only use that for a few hundred pounds worth of purchases per month and pay it off in full. This is the only card I have now.

When I said I had a missed payment, it got to the point of being a default and the card was then cancelled. So it is unforunately having a more serious impact on my score.

I could get another credit card, but as it's the same type of credit, it won't necessarily help me increase my credit score. Hence the thought about getting a loan. 

andythelyonhart

Jami74 said:

andythelyonhart said:

So, it's not the credit score in and of itself I'm worried about, but making sure I'm improving the visible credit history for the future for when I would like to secure a mortgage. I've done the obvious things like being registered to vote, etc. But having more 'settled credit' is one of the ways the agencies recommend I need to improve my score. As I'm making a large purchase I thought it would be a good opportunity to take out a loan for this reason, but to pay it back really early (thereby minimising the interest payable) but hopefully maximising the good effects for my credit score. 

I don't know how the mortgage algorithms work, but taking out a large loan and then paying it back a few days later to avoid interest doesn't really demonstrate that you can handle credit well, just that you requested credit and then changed your mind about needing it. Maybe a second credit card that you put a few regular purchases on and pay off in full by direct debit? Things like phone contracts and broadband should also show up on credit files, if you haven't got a phone contract in your name already you can get cheap SIM only ones.

Thank you. My plan would be to pay it back early, but not within a few days. Perhaps within 6 months, say, which would minimise the interest payment. I would have thought that demonstrates I can handle credit well. I've got utilities/phone contract in my name so that's done, but otherwise have a very simple financial life, and don't have much going on, so there's not much for the credit agencies to see. Though the way they calculate the scores does seem to be a bit mysterious!