How a Personal Loan Can Improve Your Credit Score

LOS ANGELES, July 12, 2021 (Newswire.com) - Personal loans can be a great way to get access to cash if you're in a pinch. They're commonly used for emergencies, home renovations, and debt consolidation. And sometimes, taking out a personal loan can actually help to boost your credit score. Let's dive deeper into what a personal loan is and how taking one out can improve your credit score.

What is a Personal Loan?

A personal loan is an unsecured loan, meaning there's no collateral like a home or car backing it up. These loans generally come with a lower interest rate than credit cards and enable you to pay back the balance with predictable monthly payments over a set period of time.

People use personal loans in various ways, including covering emergency medical bills, making home renovations, or consolidating debt. And if you're smart about using a personal loan and paying it back on time, it may help to increase your credit score.

How Personal Loans Can Boost Your Credit Score

If you're actively working to better your credit score, taking out a personal loan can help by impacting several areas of your credit score, like:

• Credit mix:  One aspect of your credit score is the type of credit mix you have. That means the credit bureaus like to see a mix of installment loans, like personal loans or home loans, mixed with revolving credit, like credit cards. When you add a new type of loan, you can gain a few points in the credit mix category.
• Lowering your credit utilization:  Credit utilization measures how much debt you have compared to your overall available credit. That means if you have one credit card or revolving line of credit with a balance of $250 and an available credit limit of $1,000, your credit utilization ratio is 25%. Personal loans do not factor into your credit utilization because they are a form of installment credit. However, using personal loans to pay off revolving-credit debt like credit cards could lower your credit utilization.
• Creating a positive payment history: Payment history is the single biggest contributor to your FICO credit score. If you've struggled to be consistent with payments in the past, taking out a personal loan is a new opportunity to make timely payments. And doing so may help your score go up.

Could a Personal Loan Hurt My Credit Score?

Taking out a personal loan has a lot of positives for your credit score. But that doesn't mean there aren't potential downsides to consider. By getting a personal loan, you could see a decline in your score if:

• You're unable to make timely payments. If you miss monthly payments or find yourself further in debt due to the loan, it could hurt your credit score's payment history category.
• You shop around for multiple personal loans. Each loan application will trigger a hard inquiry on your credit report. And each of these hard credit checks may ding your score a few points. Try to limit loan applications or only apply for a personal loan with the lender you plan to use.

The Bottom Line

Taking out a personal loan can help to improve your credit score. Just remember that there are also risks to consider. Ensure that you have a well-defined purpose for taking out the loan, whether it be debt consolidation or emergency relief, and put a plan in place to ensure you'll make timely payments to help boost your score.

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

Source: iQuanti, Inc.