Can applying for online loans damage my credit score?

Can applying for online loans damage my credit score?

We are so lucky, as consumers, to have such an in-depth choice when it comes to taking out an online loan. Most borrowers will spend time shopping around until they feel they’ve found a lender that offers the kind of loans they are looking for.  However, it’s impossible to know, for sure, whether you’ll be accepted, or how much you will be offered over what timeframe, until you have actually applied. 

This is where the problems can begin for some. Every time you apply for a loan, a ‘hard search’ goes on your credit record for a limited time – usually two years. This can impact your credit record negatively, but usually only slightly. When you make repayments to a loan, or act in other financially responsible ways, you can improve your credit score, quickly repairing any damage done during the application process.

So, the best advice is to limit the number of online loan applications you complete, as each will usually have a negative impact for at least a while. Lots of applications in a short amount of time could make it more difficult for you to secure credit in the future. With this in mind, here’s our guide to limiting the impact of online loan applications on your own credit score.

How do I know if I will be approved for a payday loan online before I apply?

It’s unlikely that you will know for sure, but there are ways to help reduce the risk of being turned down:

Read the lending criteria carefully

Loan providers who practice responsible lending will have their eligibility criteria clearly stated on their website. Initially, look at the minimum lending criteria, which will usually include the following requirements:

  • A minimum age restriction
  • Nationality requirements
  • Residency requirements
  • Bank account requirements
  • Contact details, such as email address
  • Internet access requirements

Check your credit score

There are a number of Credit Reference Agencies (CRAs) that all carry slightly different credit scores for you. You can often find out your credit score for free by signing up to a free trial or you may want to pay a small fee to access your information. This service allows borrowers to see their credit record, or at least some of their credit information, which will give them some indication of whether their credit score is healthy or if it needs a little work. 

Many of these CRAs will show you whether your credit score is excellent, good, fair, or needs improvement. You will also be able to see how much you owe across your various forms of credit and whether your score has increased or fallen in recent times. This may help you to see if your score has been damaged as a result of applying for loans. 

The fact that this type of information is available so readily is a major advantage to consumers looking for loans these days. It makes sense to arm yourself with as much information as you can before embarking on your loan journey to minimise the risks involved.

Can you afford the total payable and the repayment schedule?

When a lender makes its decisions, it’s not just looking at your credit record, but also other financial factors that might have an impact on whether you can afford to make the repayments. For payday loans, for example, responsible lenders will check when your next payday is and how much you earn. They will also ask about your employment status and how much you pay out each month in regular costs such as rent, groceries, bills and servicing other loans. 

It’s vital that you take a look at these figures yourself and work out whether you will be able to comfortably repay the loan over the instalments you have agreed. In the case of a traditional payday loan, you may be asked to repay the loan in full on your next payday. If you don’t really believe you can do this and still have enough left over to get through the following month, then a payday loan is most certainly not the right option for you.

Is this the right lender?

One more way to minimise your chances of being turned down for a loan, is to ensure that the lender you are applying to offers the kinds of loans you need. If you need to repay a loan over several months, don’t apply to a traditional payday lender who will ask for a lump sum repayment. If you need to borrow several thousand pounds, make sure your lender offers significant personal loans and that you can afford to repay the entire sum over the number of months required. 

Every lender offers something slightly different, so take the time to do some research and find out whether your lender works for you.

Our top tips for boosting your credit score:

1. Use your credit card sparingly

If you have a credit card, use it sparingly and try not to use your whole limit, as this will show credit ratings agencies that you are able to function well without maxing out your available credit, which will reflect well on your rating.

If you do not have a credit card, consider applying for one and using it little and often. Make sure you always make your mimimum payments, otherwise your credit card could become more of a hindrance than a help. 

2. Make sure you’re on the electoral roll before applying for a loan

Being on the electoral roll is an easy way to boost your chances of being accepted for an online loan, or any other credit for that matter. If a lender can verify your identity and address through the electoral register, you appear like a much safer bet than someone who isn’t registered.

3. Bills, bills, bills – they’re not all bad – when it comes to your credit rating

When your name is on a utility or phone bill and you personally, or your household, makes payments on time, this will reflect well on your credit score. 

4. Keep a close eye on your score and report

Checking your credit report regularly will allow you to spot any inaccuracies, missing information or fraudulent activity. Correcting errors and flagging up activity that doesn’t quite look right can help to ensure your rating is accurate.

Can taking out payday loans online boost my credit score?

As with any loan, the impact a payday loan has on your credit score is all down to whether you stick to the terms of the loan and make all your repayments on time and in full. If you take out a payday loan and service it correctly – treating it as a one-off fix to a financial emergency, rather than a long-term solution to a more serious money problem – then you could see some improvement in your credit score from taking out a payday loan online.

Will missing my online loan repayments damage my credit score?

In a word, yes. Missing any loan repayments will almost certainly damage your credit score to some degree. However, this doesn’t mean that the damage lasts forever. Remember, positive actions, such as those we looked at above, will help to restore your credit record even if you have made some mistakes in the past.

The takeaway?

Applying for loans online is a convenient way to access credit, and there’s masses of choice out there. However, this is a resource that must be treated with caution. It’s vital to remember that every time you send off an online application for a loan of any size, it will be recorded on your credit report for a considerable amount of time. Make too many of these applications, and lenders will start to look upon you in a less positive light. 

Your motivation for filling in lots of forms may be simply to check the actual rates you will be offered before taking up an offer. However, in this scenario, your motivation doesn’t really matter. So, our advice is to use online lenders’ tools and loan calculators to help you make your decision and leave the application forms to the point at which you are as certain as you can be that you’ve found your perfect loan.

Looking for a direct lender loan on a realistic payback schedule?

Warning: Late repayments can cause you serious money problems. For help, go to moneyadviceservice.org.uk

Representative Example: Borrow £400 for 4 months, four monthly repayments of £197.48. Total repayment £597.48, interest rate p.a. (fixed) 255.5%. Representative APR 939.5%. Compare Moneyboat loans.

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