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August 16, 2020

Do Short Term Loans Effect Your Credit Rating?

Short term loans effect your credit rating but are very handy when it comes to bridging gaps in your budget. Anyone can have a sudden shortage of cash brought about by emergency medical expenses or unexpected repair costs. Due to the global pandemic, some companies reduce working hours which results in lower salaries that affect your well-planned budget.

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Why Apply For A Short Term Loan or Credit?

With all the available loan products out there, why short term loans? There are many benefits in taking out a short term loan such as:

  • Fast approval: Unlike instalment loans, short term loans are synonymous with fast cash and quick loans. A payday loan, a type of short term loan can be granted in a few hours up to the next business day.
  • Be debt-free more quickly: Short term loans are suitable for people who want to become debt-free faster because it is payable in a few weeks up to a year. Some types of instalment loans, on the other hand, take a few years to fully repay.
  • Available for various types of credit scores: Short term loan providers accommodate different types of borrowers. So whether you have zero credit or bad credit, you can still avail of a short term loan to take care of your immediate financial needs.

Simply said, short term loans are excellent financing options for people who need a small amount and willing to repay in weeks to several months. Short term loans are also available to borrowers with different credit statuses.

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Will My Credit Score Affect My Loan Application?

A person’s credit rating can be affected by several factors. But first, let’s understand what a credit rating is. A credit rating is typically a score that can be anywhere from 0 and 1,200, with the lower end of the scale pointing to a bad credit score. Credit reporting agencies determine your credit score based on financial transactions and behaviour. In a nutshell, your credit rating is a symbol of your creditworthiness.

Why does your credit rating matter when you want to borrow money?

Your credit rating has a significant effect on your loan application, particularly the interest rates that will be applied to your debt. Borrowers with bad credit are seen as high-risk, compared to those with fair or good credit ratings. Banks and mainstream lenders usually do not entertain loan applicants with bad credit scores. Non-traditional lenders like MagicLoan, however, still accommodate credit-impaired borrowers if they can provide proof that they are financially stable and capable of repaying their debt.

The factors that affect an individual’s credit rating in Australia are the following:

  • Multiple loan applications
  • Late payments of bills, credit cards, and loans
  • Non-repayment of loan obligations
  • Failing to fix credit report errors
  • Not checking your credit report every 1 to 2 years
  • Maxing out your credit card
  • Getting sued for unpaid debt

Your credit rating can also be negatively impacted if your spouse or partner has an unpaid debt that you co-signed. If you share a credit card with someone, chances are, your credit score is also pulled down when he or she is not a responsible borrower.

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Will Lenders Check My Credit Rating if I Apply for a Loan?

Obtaining a short term loan can also affect your credit rating – in a good or bad way. However, it all boils down to the proper use of bad credit loans to avoid getting bad credit scores.

Applying for several short term loans not only lowers your credit score, but it also sends red flags to potential lenders. Instead of taking out a loan each time you need a small amount to tide you over to the next payday, why not ask a trusted friend or relative for a loan? You should also take time to assess why you need a short term loan every so often – you may need to reassess your budget and spending habits.

Late loan repayments will also lower your credit rating, and these will all be recorded in your credit history. It is therefore crucial to pay your loan dues on time as well as your credit card and utility bills.

Short term loans are not bad for your credit rating – it only affects your score negatively when you do not use it wisely. Paying on time, every time will help improve your credit score over time. If you have bad credit and you want to rebuild your credit rating, handling a short term loan responsibly will look good on your credit file.

Where Can I Go and Get Help for  a Short Term Loan like Payday Loan?

Having a good credit score is beneficial because it shows that you know how to handle your financial obligations. If you want to boost your credit score, there are simple but effective ways to do it.

  • Make sure you check your credit rating every year or two – report immediately if there are errors. Take advantage of free credit reports and learn how to calculate your credit score.
  • Settle your financial commitments on time. Set up direct debit arrangements to avoid missed deadlines.
  • Reduce your debt-to-income (DTI) ratio by paying more than the minimum payment required from your monthly. A good DTI can help you obtain a loan with better rates.
  • Pay off your outstanding credit card balance. Too much debt in your credit card is bad for your rating. There’s no need to cancel your cards, just make sure to pay your bills every time in full as much as possible and avoid using plastic money for unnecessary purchases.
  • Apply for credit only if you need it. Every credit inquiry pulls down your rating several points unless you are taking out a loan from a no credit check short term lender. Unlike regular home loan and unsecured loan providers, direct lenders may only perform a soft credit verification which does not hurt your credit score.

Obtaining a loan is easier nowadays but keep in mind that as a borrower, you are bound to the credit agreement that you signed. Using a short term loan responsibly can have positive effects on your credit score. A reputable payday loan provider like MagicLoan ensures you can obtain a loan that is suited for your requirements and qualifications.