How a personal loan can help your credit rating
Apart from your credit rating, if you have previously been approved for a personal loan and paid off that loan on time, that is a good sign for banks that you will pay off a future loan from them. So it adds to the credibility of your character in your loan application.
From 2014 in Australia, credit reports include more than just any “black marks” and show positive information about:
- The type of accounts you’ve held and when they were opened and closed
- The credit limits on your credit cards
- Whether you made your monthly repayments on time for credit cards, loans, mortgages, and other bills including phone and utilities
If you’ve successfully had a bunch of different accounts including a credit card, a personal loan, and other bills, then your application will look better for lots of different types of loans.
Pro tip: Having someone with a good credit rating co-sign a personal loan with you greatly improves your credit rating. Their good reputation rubs off on your file.
How a personal loan can hurt your credit rating
If you manage your personal loan well and pay it off regularly without falling behind in payments or accruing excessive interest, then it definitely helps your credit rating. If your credit file shows overdue bills or payment defaults on a personal loan, that’s a disaster for your credit rating.
Your credit rating will also reflect all loan applications (“enquiries”) you’ve made in the past five years for a loan or a mortgage. So if you’ve been making a lot of loan applications recently before this one, your credit rating is lowered and your application will be unlikely to be approved.
Should I pay off my personal loan early?
There’s actually no benefit to paying off a personal loan earlier than required. The whole point of adding a personal loan to your credit history is to show that you can be responsible with a different type of credit (installment credit) that stretches over a longer timeframe. If you want to have a long positive history of paying on time, you should keep your loan open for its full length if you can.
However, if you are on a low income or at risk of over-spending, you should absolutely pay off your loan in the quickest time possible. MoneySmart especially recommends this to be a “wise borrower” and reduce the interest you end up paying. Before you take out a loan to borrow money, use their budget planner at moneysmart.gov.au to see exactly what you already spend and what repayment amounts you could afford to add on top.
By comparison, it does help your credit rating if you pay off your complete debt on your credit card asap every month. This lowers your debt-to-credit ratio, which makes you look more reliable. You also want a low credit limit for a low amount of potential debt, but that raises the debt:credit ratio, so it’s a balancing act. Read more about it here.
How can I find out my current credit rating?
One of the main credit rating assessors used by Australian banks, Veda says 78% of Australians haven’t checked their credit history. But you should, because it’s free! On the Veda Australia website, you can get your credit history for free or get a more detailed credit report about your credit rating for a fee.
The other credit rating assessor used by Australian banks is Dun & Bradstreet (DNB). On their website, you can check your own credit rating, check the credit rating of a business you’re considering working with, or collect debts owed to you through their industry-leading debt recovery service.
If you’re on a low income, you may be eligible for a no interest or low interest personal loan.