How an Installment Loan Can Affect Your Credit Score

iQuanti: Installment loans let you borrow money at a fixed interest rate and pay it back in fixed monthly payments of principal and interest. You can use them for a variety of purposes, such as refinancing debt, funding a home renovation, or quickly creating an emergency fund. 

If you're working on building or repairing your credit, it's critical to know how these types of loans can improve or harm your credit score. Let's dive deeper into how an installment loan can affect your credit.

1. Applying for a loan can harm your credit score slightly

When you apply for an installment loan, some lenders will perform a hard inquiry, which means they'll take a formal look at your credit score and history. These hard inquiries damage your score a little bit. However, as you build up your score over time, hard inquiries do less damage each time you get one. Plus, hard inquiries fall off your credit report after two years. When they fall off, your credit score may go up.

Although it may be difficult to find installment loans with no credit check, there are many lenders that will only conduct a soft inquiry during the approval decision process. Soft credit checks won't affect your credit score and will only be visible to you.

4. Making on-time payments can improve your score

Two of the biggest factors used to calculate your score are your payment history and credit history length.Because of this, making on-time payments each month can add up significantly when it comes to improving your score. Likewise, missing payments may harm your score, so try to make all your payments on time.

2. Adding the loan to your credit mix can improve your score

Your credit mix is an important factor in determining your credit score. It looks at how many credit accounts you have open and how diverse they are. By taking out an installment loan, you're expanding the number and diversity of your credit accounts, which can help give your score a boost relatively quickly.

3. Paying off credit cards with the loan can improve your score

Credit utilization is another factor used to calculate your credit score. It measures how much you're borrowing from your revolving credit accounts (credit cards and lines of credit) relative to your credit limits on those accounts. So, if you get an installment loan to pay down your credit card balances, you could improve your score by reducing your credit utilization.

The bottom line

Installment loans can impact your credit in a lot of ways. The initial hard inquiry harms your score slightly, but you could easily offset this damage by making timely monthly payments. Plus, adding the loan to your credit mix and using it to reduce credit card debt could offer another credit boost. Overall, make sure you only borrow what you can afford to pay back to reap the benefits of installment loans.

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

Source: iQuanti

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Categories: Personal and Family Finances

Tags: financial services, loans, personal finance