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How paying back a loan can improve a bad credit rating

Oct 27, 2020 | Finance Tips

Looking for ways to improve a bad credit rating? One solution is actually to pay back a loan. Take a look at why this is a helpful way to improve a bad credit rating.

If you have a bad credit rating/score, it could be because you owed someone money for a long period of time. You may also have an unpaid bill you have forgotten about or missed payments on a credit card.

Discovering you have a bad credit score can be disheartening, but it doesn’t have to be permanent. The good news is that there are ways of boosting your credit score to make it easier for you to borrow larger amounts of money in the future. One of these ways is by paying back a smaller loan first.

Improve your credit score by paying back a loan: How it works

Your credit score is determined by a number of factors, including whether you have unpaid debts or made late repayments.

A significant factor influencing your credit score is your payment history. This includes your record of repaying your credit card, settling your bills and paying any ‘instalment loans’ on time. These can be student, home, car or personal loans.

By paying back a loan regularly and on time, you can improve your viability as a reliable borrower.

It may seem counter-intuitive, but improving your credit score by paying off a loan makes sense when you understand how your credit score is calculated.

For a better shot at getting a larger loan in the future, it’s important to show existing creditors that you can be trusted to pay back your current, smaller loans in a timely way. As well as materially impacting your credit score, it will add to your credibility with future lenders.

Be strategic with loans to improve your bad credit rating

Paying back a loan reflects well on your credit worthiness if you don’t miss repayments over a period of time.

The longer you can reliably demonstrate your ability to pay back a loan, the higher your rating goes. To stay on track, manage your accounts by setting up regular direct debit loan repayments and consistently reviewing your finances.

How do I get a loan if I have a poor credit rating?

All this seems like good news, but what if the usual banks and lenders knock you back because of your bad credit rating? How can you climb onto that first rung of the lending ladder to help rebuild your score?

Smaller, more flexible lenders like Finance One take a personalised, compassionate approach to your lending needs so your credit history doesn’t have to define you forever.

Finance One can work with you to provide a loan based on your individual circumstances.  As a result, you have the power to improve your overall credit score.

Case study

Still not clear on how paying back a loan can improve your credit rating? Consider this example:

‘Mike’ had worked hard since leaving home at 18 to follow his dream of becoming a diving instructor on the Great Barrier Reef.

It was tough to find regular work while he built up his experience and Mike struggled to minimise and repay his credit card debt as well as paying bills and rent. Even once he settled into a fulltime job and began earning a decent wage, he still couldn’t get a loan from any of the banks to buy his first car because of his poor credit rating.

Mike approached Finance One. He was able to get a five-year car loan with affordable monthly repayments. He was careful not to miss a single repayment and when he applied to a bank for a mortgage on a unit with his girlfriend six years later, he had no trouble being approved.

Read more: https://financeone.com.au/blog/top-5-tips-to-improve-your-credit-rating

Finance One is a non-bank lender that provides opportunities for everyday Australians to rebuild their credit rating and improve their lifestyle.

Working your way back to having a good credit score is definitely achievable. Making regular repayments on a loan from Finance One could be the first step for you. Normal lending criteria, terms & conditions and fees & charges apply.

Disclaimer: The information above is of a general nature only and does not consider your personal objectives, financial situation or particular needs. You should consider seeking independent legal, financial, taxation or other advice to check how the information relates to your particular circumstances.  We do not accept responsibility for any loss arising from the use of, or reliance on, the information.


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Makala Elliott

Makala is the Marketing Manager at Finance One. She has worked in the Finance and Lending industry for over 10 years, gathering a wealth of experience. She is passionate about helping Australians get back on track with their finances by passing on her knowledge.

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