Credit scores, believe it or not, play an intrinsic role in deciding the rate of interest. They throw light on your past payment behaviour, which, if not so good, calls your credibility into question. Unfortunately, the impact of missed payments remains on your credit report for six years, lowering your chances of qualifying for affordable interest rates.
Although some financial experts believe that the impact of old inquiries and missed payments is not so intense, many borrowers end up with disappointment. Thankfully, there are some loans that sound promising to help improve your credit score. Your credit score will improve, and interest rates will decline. It seems interesting, but is this a fact or a gimmick?
Products that claim to improve your credit rating
There are several loan products that claim to help do up your credit rating. One of the most popular ones is credit builder loans. You will be allowed to pay down a fixed sum of money every month, normally for a period of up to 6 months. Interest rates, however, will be quite high. Some lenders provide credit builder cards requiring you to pay the balance off in full monthly. Unfortunately, they are in very expensive debt. They most likely lead to more expensive debt.
Experian Boost is another loan product that claims to help make your credit report look better. However, they make a small difference to your credit score. It is still not known whether they actually help you qualify for lower interest rates because lenders use their own method to check your repaying capacity rather than the score you can see.
Some lenders on the market provide competitive APR to bad credit borrowers. Though the annual rates they charge are not so cheap, they are not as high as interest rates other lenders charge subprime borrowers. The good thing about such lenders is that they will review your credit report every three months and will reduce interest rates by 2% for every 25 points your credit score has improved.
Problems linked to credit builder loans and cards
It seems amazing that you will be charged lower interest rates as your credit score continues to improve, but there are potential problems associated with them:
-
They are using a score that you cannot see
There are three credit reference agencies – Experian, Equifax and TransUnion. Your lender can refer to the score from any of these agencies. It is not surprising at all that many borrowers are under the impression that lenders use scores from any one of the agencies, but the fact is that the credit rating they use to make a decision is what you cannot see on your credit report.
It means that such lenders use a three-digit number that is calculated by credit scoring algorithms that you are not told anything about. You cannot check it, nor can you complain about it if you think it is wrong. The score lenders use is called a management score, and they have their own calculation criteria to determine this three-digit score. Unfortunately, nothing is mentioned about it on their websites. It is not known to people what information serves as the basis for deciding this score.
It does not matter so much if the management score is close to the one that customers can see on their credit report and they both get affected by your credit management behaviour in the same way. There is a 100% chance that your credit score goes up, and despite that, you do not see any reduction in your interest rates. According to one of the customer’s complaints, he was told that his initial credit score was good, but on the first review, it was discovered that it had significantly dropped.
So, nobody knows what grounds lenders have been using to determine a management score and what factors are causing them to go up and down. Customers should be warned about the loan products that claim to let them avail themselves of reduced interest rates as their credit score goes up.
-
Customers may be overly optimistic about their loan products
People do not know the actual meaning of credit score improvement. Of course, when you pay off a debt on time, your credit score will improve, and this is true in the context of consolidation loans. You will certainly find lenders saying it may help do up your credit rating.
However, some borrowers believe that repaying defaulted debt can also improve their credit ratings. Whether a defaulted debt is to be paid back in instalments or one go, like an advance money loan is paid, repaying a defaulted loan will never ever help build your credit score. So, even though lenders do not advertise that repayment of defaulted loans will help up your credit score, many borrowers raise their expectations high up.
-
Misconceptions about these products
When your credit score goes up, the interest rate will certainly reduce, but there may not be a significant drop in the size of payments you make every month. A reduction in interest rates by 2% means that your monthly payment will be reduced by £5 or £6 only.
Similarly, when you consolidate your credit card bills, overdrafts, and other small credit, you think that you are saving money, but they are helpful only if you close other accounts. Otherwise, you are highly likely to run up again.
-
Marketing is not transparent
One of the problems with such loan products is that they claim to be improving your credit score, but they lack transparency.
- Borrowers do not know how the score is calculated.
- People often do not know what affects their credit score and what does not.
- People are overly optimistic about some products, such as credit builder loans, ExperianBoost and consolidation loans
Ways to fix your credit score
No matter how many loan products are available on the market claiming to help you improve your credit score, none of them is effective to have a significant improvement.
Even if queries and defaults become older, they will be taken into account by lenders to determine interest rates to be charged. Here are some tips to ensure your credit score does not plummet:
- Do not borrow more than you can afford. Take into account the unexpected.
- You should use credit cards only for urgent purchases and do not use up more than 30% of the limit. Make sure you set aside the amount so you do not face any complications when the bill is generated.
- Use cash as much as possible for all of your purchases.
- If your financial situation has turned upside down, talk to your lender before it is too late.
- While using loans online for fair credit, compare interest rates and choose a deal with lower interest rates.
The final statement
Getting low interest rates when your credit score improves is not easy. The marketing of various loan products lacks transparency, and borrowers are not well aware of the nitty-gritty details about them.
