Improving Your Credit with a Personal Loan

by Staff

Your credit score plays a role in several financial decisions. Whether you’re applying for a mortgage, car loan, or a credit card, lenders will assess your credit to decide whether to lend you funds

 

A personal loan can be a convenient and straightforward tool for improving your credit while providing you with upfront cash to handle expenses. Let’s look at how you can use a personal loan to increase your chances of approval for financial products with more favorable terms and interest rates.

How does a personal loan improve your credit?

Taking on a personal loan can help you improve your credit by positively affecting several factors used by credit reporting bureaus to calculate your credit score. These factors may include:

Payment history

Your payment history involves whether you make the regular minimum payments for loans and credit card balances on time. Paying back your personal loan installments on time can improve your payment history and will positively affect your credit.

Credit mix

Creditors like to see that you can handle a mix of credit, including revolving and installment credit. If you already have revolving credit, such as a line of credit or a credit card, taking out installment credit, like a personal loan, will diversify your credit mix and improve your credit. 

Consolidating debt

Simplifying the debt repayment process for lines of credit or credit cards with a personal loan can make it easier for you to make successful, timely payments. This helps to improve your payment history. By paying off multiple credit cards with a single loan, you’ll also lower your credit utilization ratio, which can improve your credit

Applying for a personal loan to build credit

If you’re thinking about applying for a personal loan as a way to build credit, consider the following steps: 

 

    • Review your credit score. Check the credit requirements for the personal loan you want to apply for. Then, review your credit score to see if you’re likely to qualify.   
    • Prepare your documents. To make the application process as seamless as possible, prepare your paperwork. Credits will usually ask for personal information (proof of identity, social insurance number) and financial information (bank statements, tax returns).
  • Make a plan for payments. You should always have a plan to pay off your personal loans on time so you can maximize potential improvements to your credit score.

Is a personal loan right for you?

A personal loan can help improve your credit by contributing to your payment history and credit mix. You can also use a personal loan to consolidate high-interest debt. Consider a personal loan the next time you’re looking for ways to improve your credit and obtain more favorable terms for financial lending products like mortgages, car loans, or credit cards.

About the Author/s

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The New Jersey Digest is a new jersey magazine that has chronicled daily life in the Garden State for over 10 years.

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