Building Credit: How a Personal Loan Can Improve Your Credit Score

Your credit score is a reflection of your well you handle your debt. And if your credit score appears to be beyond repair due to consequential actions in the past, there are several things you can do today to improve it. Researching is key to finding out what is best for you. A good starting point would be to search fix my credit. But there are many different options. One of those options is taking out a personal loan.

While it may seem rather counter intuitive to use an easy loan to improve your credit score as acquiring a loan means more debt, as long as you maintain a positive payment history on the loan in question, you can maximize the loan’s impact on your credit history.

Defining Personal Loans

Before we get into how personal loans can improve credit scores, we have to understand exactly what a personal loan is. By definition, a personal loan is an unsecured loan. Unlike car loans, mortgages or student loans which are required to be spent on specific purchases, personal loans are discretionary funds. Further, personal loans are backed by any collateral.

Personal loans are good for expenses, like medical expenses not covered by insurance. They can also be used to cover specific costs or large purchases such as appliances or home improvement projects. When used with consideration, a personal loan may be better at positively impacting your credit score than a credit card.

Here are three ways a personal loan can have a net positive impact on your credit rating.

Consolidating Debt

If you have debt from multiple sources or existing high-interest debt, one way to make payments more manageable and to pay off your overall debt load is to obtain a personal loan.

Personal loans can organize and consolidate existing debt into more manageable payment options. Unlike high-interest credit cards, personal loans come with a lower interest rate and feature more accessible payment installments than credit cards.

Further, debt accrued on a personal loan won’t negatively impact your credit score in the same fashion as it would on your credit card (provided you stick to the payment schedule as agreed upon with your lender).

Employing personal loans to consolidate existing debt can accelerate how quickly you can become debt-free.

Increases Available Credit

If you’re the type of individual to constantly max out your credit cards to manage debt, you may be negatively impacting your credit score without knowing it. Certain factors are used to calculate a credit score, with various criteria given more weight than others. The two most important determining factors are payment history and amount owed.

These two factors account for more than 60 percent of your overall credit score. And when credit cards are used to manage debt or make payments, your ratio between available and used credit becomes negatively slanted, impacting your credit score.

This is where personal loans can make a difference. With low-interest rates and affordable repayment plans, you are able to save on accumulated interest, significantly freeing up more available credit and reducing the amount owed to positively boost your credit score.

Managing credit

The other factors that are evaluated when determining your credit score include:

  • New credit
  • Length of credit history
  • Credit mix

Obtaining a personal loan will immediately affect these three remaining factors. When you apply for a personal loan, this will impact, albeit temporarily, your new credit criteria. And as long as you mindfully manage the monthly payments on your personal loan, you improve the credit rating of the latter scoring factors: length of credit history and credit mix.

Diversification always makes financial sense, as it reduces reliance on a singular credit type and allocates risk among various credit instruments. Under the right circumstances, diversifying your credit profile with a personal loan can increase your credit score.

Also read: Check your Credit Score in 5 easy Steps

Other Considerations

Your ability to establish a methodical payment history will prove beneficial. Struggling with financial issues can put a lot of stress on anyone. Many people don’t think this, but there is a way around dealing with this sort of pressure. There are many industry experts and companies out there like LeverageRX, who can be your answer to finding the right solution in order to get your financial life back on track. And soon, this will be positively reflected in your new and improved credit score. But, this can be a double-edged sword.

As you improve your credit score, your eligibility for other loan instruments increases. Borrowing even more credit can become an easier route. And if this is poorly managed, it can have a devastating effect on your credit score.

Remember, a personal loan, like any other credit instrument, can be a helpful financial tool. It is how you use it that determines its impact your credit score.

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About FinanceGAB

Ajeet Sharma is a financial blogger and I am blogging since 2017. Financegab is a personal blog dedicated to personal finance. The main aim of this blog to help people to make well-informed financial decisions.
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