Can a Personal Loan Help Build One's Credit History?

iQuanti: If you've ever tried to borrow money, like taking out a personal loan, you know that your credit history and credit score can play an important role. This is because some lenders use your credit history to gauge your riskiness as a borrower. Luckily, you can still get a personal loan with no credit history and can even use this loan to build your credit. If you're looking to build your credit history, here's what you need to know about and if taking out a personal loan can help.

How does credit history work?

Your credit history is a log that tracks your ability to repay debts. And it has a huge influence on your credit score because it tracks important aspects that create your score, like your payment history, total debt, and the types of accounts you have open. There are multiple parts to your credit history, including:

  • Personal information: This section includes your personal details like your name, address, and social security number.
  • Current and past debt payments: The debt section includes all types of loans, including personal loans, auto loans, and credit cards. It will detail the amounts outstanding, how much you've paid, and if those payments have been timely, late, or unpaid.
  • Length of credit: Along with tracking payment history, your credit history also shows how long your various lines of credit have been open and when loans are closed.

To view your credit history, you can download your credit report for free once each year from each of the three major credit reporting bureaus: Experian, Equifax, and TransUnion.

How does credit history impact credit score?

Building credit history is essential because it has a direct impact on your credit score. Your score is made up of 5 parts:

  1. Payment history (35%): A record of past debt payments and whether they were on time, late, or missed.
  2. Amounts owed (30%): The current amount of debt you owe vs. overall available credit.
  3. Length of credit history (15%): The amount of time your debts have been opened and how long since you've used them.
  4. Credit mix (10%): The different loans you have in your name, including installment loans and revolving lines of credit.
  5. New credit (10%): The number of new credit accounts you've opened recently.

How can a personal loan help build credit history?

A personal loan can certainly help build your credit history, but you'll need to ensure that you're making timely payments consistently for the personal loan to have a positive impact. A personal loan can build your credit history in multiple ways, including:

  • Adding to your credit mix: If you don't have any existing installment loans, taking on a personal loan can add a new dimension to your credit mix and help to boost your credit score in that area.
  • Increasing your length of credit history: The longer you have and consistently pay off a personal loan, the more time it adds to your credit history.
  • Creating a more favorable payment history: If you make payments on time and in full, you'll build your credit history so that you get more points in the payment history section of your score.

The bottom line

Building credit history is essential for when you want to take on debt in the future. And taking out a personal loan can help build your credit history by diversifying your credit mix, extending your length of credit history, and creating a timely payment history. But you'll want to be sure to make all loan payments on time and in full to ensure that your personal loan will reflect positively on your credit history.

Notice: Information provided in this article is for information purposes only. Consult your financial advisor about your financial circumstances.

Source: iQuanti, Inc.


Categories: Personal and Family Finances

Tags: credit history, financial services, personal finance