Are you looking to boost your credit score? As per national statistics, 11.7% of Americans have a FICO score of 549 or less (considered poor), and only 20.4% have a score of over 800. Whether you are looking to qualify for a new home or car, getting a personal loan can help get you build your credit.
So, how do personal loans help with your credit score?
With personal loans, you can build up positive payment history, which accounts for 35 percent of your FICO score. By paying on time, it demonstrates that you can handle debt responsibly. Keep in mind that payments not done on time, and within the terms of the loan, will negatively impact your credit score.
Following some simple rules can ensure that you increase your credit score over time:
- Make your payment on time: This is the most important thing you should keep in mind with any loan: always make your personal loan payments on time. It helps to establish a positive payment history, which then builds your credit history and credit score. (The key is to make sure you can make the loan payments in full and on time every month. Even one late payment can be devastating).
- Don’t borrow more than you need: You should only borrow the amount you need. Just because you are approved for a $5k loan doesn’t mean you have to borrow the entire amount. Regardless of the amount you borrow, as long as you pay on time, it will help you build credit.
- Set up automatic payments: This is just a way to make sure you never miss payments. With automatic payments, your loan is paid on the due date by itself. The more on-time payments you have, the faster you will start noticing your credit score go up.
- Explore credit consolidation: Here’s another tip on how to use a personal loan wisely and for your benefit. You can use a personal loan to reduce your credit card debt, which automatically lowers your credit utilization ratio.
If you take a $5,000 personal loan with an interest rate of 12.9 percent and two-year repayment term, you’ll pay approximately $237.50 per month and approximately $700 in interest over the life of the loan. Plus, you’d lower your credit utilization on revolving accounts to zero (assuming you do not make any further purchases).
However, if you continue to make the minimum payments on your credit card at 19.99%, it will take a much longer time to pay off those balances.
- Shop around for the best deal: Don’t jump on the first offer that comes your way. Even if the offer looks tempting, you should do your research and find out what other lenders have to offer before making a final choice. Understand what the interest rates and associated fees are because the lower they are the more you save in the long run.
- One lender at a time: Don’t be in haste when applying for loans with many lenders at the same time. Each time you apply for a loan, your credit report reflects it as a hard inquiry, which can cause your credit score to dip. Inquire with just one lender that you’re confident will approve your application, as this can minimize the impact on your score.
- Don’t be tempted for other kinds of debt: You will notice your credit score will increase as you make payments for your personal loan. With an increased credit score, you may be eligible for other types of loans. Don’t be tempted with the other offers you receive, just because you are eligible for them.
- Read the fine print: Once your personal loan gets approved, the deal is finalized by signing the paperwork. Be sure never to rush this process. Pay very close attention to the section on fees and penalties, and seek clarity for any components of the agreement that you don’t understand.
A personal loan can actually help you improve your credit score if you use it wisely. As long as you make sure all your loan payments are on time and that you do not apply for multiple applications for credit, a personal loan will boost your credit score.
If you would like to jumpstart your efforts, consider a personal loan from LoanMe. You can speak to one of our agents about the benefits, such as lowering your fees by consolidating and the possibility of receiving the loan in under 5 hours.