How to rebuild your credit after taking a bad credit loan

Sometimes, circumstances mean you need to take out a bad-credit loan to deal with an emergency or meet a financial goal. It's better to use a less-than-perfect tool to solve a problem than to not address the problem at all.

What's more, a bad-credit loan doesn't stop you from rebuilding your credit—and it may actually help you. You could even start rebuilding right away. Making consistent on-time loan payments could improve your payment history, the largest factor in your credit scores.

On-time loan payments aren't the only move that could boost your credit. Here's how to build your credit after taking on a bad credit loan.

Achieve is not a Credit Repair Organization and does not provide, or offer, services or advice to repair, modify, or improve your credit.

How a bad credit loan affects your credit score

In the short term, a bad credit loan doesn't impact your credit score any differently than a loan you'd get with a higher credit score. Loan interest rates don't appear on your credit report, so lenders that run your credit won't automatically know you have a bad credit loan.

The short-term impacts from opening a new loan could include:

• Credit inquiry. Lenders check your credit with a hard inquiry when you apply for a personal loan, which can cause a small drop in your FICO credit score for up to a year.

• Revolving utilization. If you used the bad credit loan to consolidate credit card debt, the change in credit utilization (how much of your revolving credit you're using) could help your credit score.

• Average account age. Taking out a new loan lowers the average age of your accounts, which could harm your credit until the accounts get older.

The main difference in how a bad credit loan could impact your credit score will be seen in the long term. That's because loans with higher interest rates tend to have higher monthly payments, which means more of your income is going to debt. This increases your debt-to-income ratio (DTI) and could make you more likely to miss payments or fall behind.

Ultimately, how you manage your loan will determine the overall impact on your credit scores. Keep up with consistent financial habits, like paying on time, and your credit score could grow quite a bit in the long term. Here are some of the potential long-term impacts:

• Payment history. Each on-time payment could be a stepping stone to better credit. The longer you go without missing payments, the better your credit score could look.

• Account history length. The older your loan gets, the better it could be for your average account age.

• Account balances. If you keep your credit card balances low and avoid taking on new debt, your credit score could grow stronger as you pay down your loan balance.

Achieve is not a Credit Repair Organization and does not provide, or offer, services or advice to repair, modify, or improve your credit.

How soon can you start rebuilding credit?

You could start rebuilding credit soon after you take out your loan. Having a bad-credit loan doesn't have to stand in the way of your financial goals going forward. On the contrary, it could even help you with money goals, like building a good credit score for your next personal loan.

Here are some active steps you could take to rebuild your credit:

• Set up your bills (including your bad credit loan) on autopay so you never miss a payment.

• Avoid taking on more credit card debt, even if it means not using your card for a while.

• Find ways to pay down any remaining credit card debt even faster, if you can.

• Keep your credit card balances low to keep your credit utilization low.

• Don't close your old credit cards (unless they have fees), so your average account age and available credit don't drop.

• Avoid opening new credit you don't need so you don't pile on more debt.

• Check your credit score updates on a monthly basis to make sure you're still moving forward.

• Check your credit report at least once a year to make sure everything's correct. Dispute any mistakes you find with the credit bureau.

How long does it take to rebuild your credit?

You often don't have to wait long for your credit to improve. Lower your credit card balances and make every payment on time, and those wins could show up fast. Your credit score could climb within a few months.

Recovery from missed payments takes a little more patience. With steady, on-time habits, many people make real progress within one to two years.

Negative marks won't follow you forever, either. Most negative information can stay on your credit report for up to seven years. Some types of bankruptcy can stay for seven to 10 years, but even a bankruptcy should age off your reports by the 10-year mark.

Credit-building tools that might help

A couple of tools could help you rebuild your credit.

• A secured credit card is a card you secure with a refundable deposit. The card could help build your payment history as you use it and pay it off in full each month.

• A credit-builder loan is sort of like a reverse personal loan. The lender holds the funds while you make payments, and those payments are usually reported to the major credit bureaus. Once you've paid in full, the lender gives you the funds.

Both tools only help when the issuer reports your payments to the credit bureaus, so confirm that before you sign up.

Achieve is not a Credit Repair Organization and does not provide, or offer, services or advice to repair, modify, or improve your credit.

Tips for getting past a bad credit loan

The interesting thing about credit is, it's never just about your credit score. Credit is a part of your overall financial picture. And the things you do to improve your overall financial health could make it easier to build good credit, too.

Here are some tips on shoring up your big financial picture:

• Stay positive. We all have setbacks, and that's completely normal. The key to moving past them is knowing you have the power to change things, even if it takes time. You're stronger than you think.

• Budget for the win. The word "budget" is scary to some people. Instead, think of it as a spending plan. You get to tell your money where to go, not the other way around. A budgeting habit could help you make sure you spend your dollars wisely.

• Pay more than the minimum. Credit card minimums aren't designed to pay off your cards quickly. Even a few extra dollars over your minimum payment could help you pay down the balance faster.

• Boost your income. Even though you're busy, if you can find small ways to earn more, you could have more money to save or pay off debt. The world is full of small side hustles, or you could consider bigger changes like a career switch.

• Build an emergency fund. Lots of people rely on debt when emergencies strike, and that could set back your progress. You could get ahead by saving up before an emergency happens. Focus on creating savings habits, a little at a time. Even $5 a week adds up to a decent amount over a few months.

Celebrate progress and stay consistent

Life is a journey. We all go through different phases, and that applies to your financial life as well. Sometimes that means having a great credit score—and sometimes it's a work in progress. No matter where you are now, you don't have to stay there.

Build some small habits that'll carry you closer to your goals. That could be learning how to rebuild your credit after a bad credit loan, or even buying a home.

When your credit is stronger and you're ready for your next personal loan, Achieve Personal Loans could be a good place to start.

Find out if you qualify through Achieve Personal Loans.