While it can take several months to raise your credit score, taking out an installment loan, such as a personal loan, can help you establish credit that can lead to more credit and lower interest rates later on. Installment loans offer multiple benefits that contribute to improving your credit score over time.
Shows On-Time Payment History
Your payment history has a huge impact on your credit score. In fact, it's the biggest factor credit agencies use to calculate your score, accounting for a whopping 35 percent of that all-important number. Even if you've had delinquencies in the past, making on-time payments on just a small installment loan can look good on your credit report.
A history of making your payments on time shows that you can manage credit effectively. The longer the history, the better your chances of raising your credit when you're trying to build a good credit score. A credit profile that shows proof of a solid payment history over time helps qualify you for a larger amount of credit, such as a home mortgage, in the future.
If you make your monthly installment loan payments on time, you'll see your credit score rise, providing the lender shares your payment history with the major consumer credit-reporting bureaus. Although some lenders also work with smaller credit-reporting agencies, the main bureaus include Equifax, Experian, and TransUnion.
Lowers Your Credit Utilization Ratio
Another way to help improve your credit score is by applying for a personal loan to consolidate other credit debt, particularly credit card debt. By moving credit card debt onto an installment loan, you reduce your credit utilization ratio - the percentage of the credit limit you have available that you use. Your credit utilization ratio is a critical factor since it counts toward 30 percent of your credit score.
This tactic only works if you don't run up your credit card balances again. But you may not want to cancel credit card accounts you've had for a while since consumer credit agencies factor length of history into your credit score. Accounts you allow to age can boost your credit score even if you no longer use them, whereas closing a credit account can actually cause your score to drop.
Although you should tuck your credit cards away somewhere so you aren't tempted to overuse them, make an occasional small purchase that you pay off in full when the bill comes due. Keep the account active since complete inactivity can age the account from your credit file sooner.
Gets Rid of Revolving Debt
Another advantage of applying for an installment loan to pay off credit card debt is a fixed monthly payment that allows you to repay the debt over a fixed loan term. Credit card debt is a revolving debt on which you usually pay a variable interest rate. The amount of your payments can change, too, since a credit card company calculates payments as a percentage of the unpaid balance.
Since you're likely paying a higher interest rate on your credit card account than what a lender charges for an installment loan, you'll save money. The less interest you pay, the less you'll be repaying on the overall debt.
Varies Your Credit Mix
The inclusion of an installment loan in your credit mix can boost your credit score as well. While the types of credit you have account for a much smaller percentage of your overall credit score - about 10 percent - creditors like to see how you handle both secured and unsecured debt.
Not having different types of credit won't necessarily hurt your credit score, but it can help. According to research conducted by FICO - a company that provides credit scoring services - consumers who show a mix of credit types on their credit reports are more likely to be less risky and repay their loans than borrowers who don't have experience with multiple types of credit.
If you need money and are looking to build your credit score, contact the The Loan Lady for more information on an installment loan with terms that will work for you.