Personal loans and other forms of installment debt can also benefit your credit score in various ways. Let’s take a look at them next. When used correctly, a personal loan can help you build or improve your credit score. A solid history of full, on-time payments will account for roughly 35% of your credit score. By simply staying on top of your monthly payments, you’re paving the way for a good credit history. It’s possible to use a personal loan to build credit, but it isn’t always wise.Building And Improving Your Credit Score
Installment debt can go a long way toward making – or breaking – your score. With an installment debt, you make payments every month over a period of months or years. This helps increase the length of your credit history, which lenders can later evaluate.
Diversifying Your Credit Mix
Your credit mix is how many types of accounts you have. These may include credit cards, personal loans, mortgage loans and the like. Lenders prefer to see that you can handle different types of credit – specifically, installment and revolving credit.
A personal loan on your credit report can give you a more diverse credit mix. If the only credit accounts you have open are credit cards, adding a personal loan can give your credit score a boost.
Lowering Your Credit Utilization
A personal loan can also help raise your credit score in an indirect but significant way. If you have a lot of credit card debt, you probably have a pretty high utilization rate. Since credit utilization is such a big factor in determining your credit score, using a personal loan to pay off your credit card debt can significantly increase your score. That’s because installment debt, such as a personal loan, doesn’t factor into your credit utilization ratio.
Whether you should use a personal loan for credit card debt will depend on your financial situation.
Consolidating Your Debt
Using a personal loan for debt consolidation can likewise give your credit score a lift.
Suppose you have several credit cards with a high interest rate and balances so large that you’re having trouble making more than the minimum payments each month. In this situation, it might make sense to seek a personal loan in order to combine and pay off all your credit card debt, trading in multiple high-interest payments for a single monthly payment with a lower interest rate. (A personal loan tends to come with a lower rate than a credit card.)
Keep in mind, however, that this tactic only works if you’re committed to reducing your credit card debt in the long term. If you use a personal loan to pay off your credit cards but later max them out again, you aren’t addressing the root of the issue.
