How to use a personal loan to increase your credit score

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You can use a personal loan to get a loan and improve your credit score, but be sure to think about how borrowing can hurt it. (iStock)

A personal loan can be a valuable financial instrument for paying off debt. Whether it is paying an unexpected medical bill or high interest debt consolidation, this type of unsecured loan has many possible uses.

In addition to helping with incidental expenses, personal loans – in addition to a car loan or student loan – can also affect your credit score. But here’s the catch – they can have both positive and negative consequences. Therefore, it is important to consider the potential effects before applying.

So how can a personal loan affect your credit rating? We look at the pros and cons of how a personal loan can improve or harm your creditworthiness. To start buying a personal loan, visit Credible compare rates and lenders.

16 BEST PERSONAL LOANS IN 2021

How to use a personal loan to increase your credit score

There are several ways a personal loan can help improve your bottom line:

1. Credit mix

Adding a personal loan to your credit report can diversify your loan portfolio. Your credit score benefits from having a large number of different types of debt, such as installment loans, credit cards, and mortgages. Your credit mix is ​​only 10% of your credit score, but it can make a difference.

2. Use of credit

Using a personal loan to consolidate credit card debt can improve your FICO rating by reducing your use of credit. Credit use is the percentage of the available credit that you are currently using. This factor accounts for 30% of your credit rating and can negatively affect it if you use more than 30% of the available credit. By shifting debt into a personal loan and freeing up credit card space, you cut down on usage.

CAN I HAVE MORE THAN ONE PERSONAL LOAN?

3. Payment history

The most significant factor affecting your 35% credit rating is your payment history. In other words, the credit bureaus want to see that you can make payments on time every month. Borrowing a personal loan and paying on time without late payment can improve your payment history and increase your credit score – from bad credit to fair credit to good credit – especially if you don’t have many other accounts in your credit. report.

If you are planning to apply for a personal loan, be sure to check your credit score beforehand. Not only will you see if your current score is in line with the best loan rates, but you will also see in which areas of your credit report could be improved. You may simply find that a personal loan can help fill these gaps.

With a credit monitoring service, you can get instant notifications about late payments, fraudulent activities, credit rating changes and more. Check out some of Credible’s partners here

HOW TO FIND THE BEST PERSONAL LOAN FOR YOUR NEEDS

Will a personal loan harm my credit history?

A personal loan can undoubtedly benefit your credit score, but it is also important to think about how it can harm your account:

1. Rigorous investigation

When you apply for a personal loan – or any debt for that matter – you will have a major check on your credit report, which could negatively impact your score. Tough requests usually have little impact, and your score will most likely return to normal after a few months. However, the effect can be greater if you open several new debt accounts in a short period of time.

2. Length of credit history.

The average length of your credit history is 15% of your credit rating, and generally a longer history is better for your assessment. Taking on new debt will shorten your average loan term and therefore may lower your credit rating.

3. Additional debt

Many people use debt consolidation loans to manage credit card debt. But if you have a spending problem, freeing up space on your credit card may simply increase your spending. Not only will you hurt your credit score further, but you may also find yourself in a situation where you can no longer afford to pay off your debts.

WHAT SHOULD I USE A PERSONAL LOAN?

What should you pay attention to when getting a loan?

When it comes to obtaining a personal loan, your goal should be to find the best deal and loan terms that are best suited to your financial situation. The following important factors should be considered:

  • Interest rate: Which lender is willing to offer you the lowest rate?
  • Loan conditions: In how many years do you want to repay the loan?
  • Fees: Many lenders offer commission-free personal loans, so be wary of those who charge excessive fees.

When looking for personal loan options, you can use Credible’s personal loan calculator to calculate estimated monthly payments and make sure they fit within your budget.

DO THESE 5 STEPS BEFORE CHOOSING A PERSONAL CREDITOR

What’s next?

Getting a personal loan will almost certainly affect your credit. But depending on your situation, this can have both positive and negative consequences. When shopping for a personal loan, be sure to consider not only its credit implications, but also how to find the loan that best suits your personal financial needs.

Ready to find the right personal loan for you? Visit Credible to explore your personal loan options and compare multiple rates and lenders.

Have a financial question but don’t know who to contact? Write to a safe money expert at moneyexpert@credible.com and your question can be answered by Credible in our Money Expert column.

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