Do Installment Loans Impact Your Credit?

iQuanti: Like any loan, an installment loan is absolutely going to impact your credit, and it can be used as a tool for building credit. Compared to other loans, installments loans are usually fixed and can be seen as a manageable way to build credit since its payments never change, you know when you'll be making those payments, and you know for how long you'll be paying off the loan. 

How to build credit with installment loans 

Make all your monthly payments on time 
Your credit score, a three-digit number based on the information in your credit report, helps lenders determine how likely you are to pay back a loan.  

The most important element of your credit score is your payment history. Consistently making all your monthly payments on time to a lender who reports your activity to a credit bureau will improve your credit score. On the other hand, missed payments or payments more than 30 days late will negatively impact your credit. 

You have a diverse mix of credit types 
When a prospective lender checks your credit report, there is a list of all the credit accounts that have ever existed in your name. Scores tend to be higher for consumers who have a combination of revolving credit, such as credit cards, and installment credit, such as mortgages, auto loans, student loans.  

You have a good credit utilization ratio 
Your credit score strongly considers your credit utilization (the amount of revolving credit you have in relation to your credit limit). A good rule of thumb is to keep your credit utilization rate below 30%. To calculate your utilization ratio, first add up all of your credit limits, then divide your outstanding balance by the sum of your credit limits.  

Taking out an installment loan to refinance and/or consolidate credit card debt can immediately reduce your credit utilization ratio.  

Should you get an installment loan just to build credit? 

It is usually not advisable to take out an installment loan strictly to improve credit, especially if you risk taking on monthly payments that you can't keep up with. But getting an installment loan with monthly payments that you can manage for a large purchase like a car or a home, or to pay off credit card debt, can be an effective way to improve your credit score.  

The bottom line 

Installment loans can impact your credit score just the same as any other type of loan. The difference is, some people find installment loans easier to manage because of their fixed payment structures. Always be sure to pay bills on time and don't hesitate to speak to a financial planner about how to best improve your credit score given your circumstances.  

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Source: iQuanti, Inc.

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Categories: Personal and Family Finances

Tags: installment loans, loans, personal finance