How a Personal Loan will help you to Improve Your Credit Score

Written by: Lilly Cobal
06/14/2019

personal-loans

Personal loans are one of the best options that can help you in financial emergencies because it comes with easy formalities and doesn’t need any collateral. If you will manage your personal loan smartly you can easily contribute to improving your credit score. You may hear that in the first place a good credit score is essential to take a personal loan. This is an important thing that you need to keep in your mind and also remember that your credit score is not the only thing that the lenders prefer to your credibility determination. There are some lenders who can grant unsecured loans to you with fair scores if they can meet all other criteria successfully. So, before moving ahead let’s have a look at different credit score’s ranges.

Ranges of Credit Scores:

Range of Credit Score Grade
0 to -1 No history of credit
500 to 300 Bad
551 to 649 Poor
650 to 699 Fair
700 to 749 Good
750 or Up Excellent

What do you need to know?

There are five main factors that are used to calculate the credit scores that are measured out of 900.

  1. History of credit
  2. Credit period’s length
  3. The total owned of debt
  4. The loans type which is taken
  5. New debt

How Personal Loans help you to Improve your Credit Score?

There is how your personal loan will help you to improve your personal loan.

Pay Old Debts:

Taking a personal loan is one of the best ways that will allow you to clear your previous dues. In this way, you are with previous debts and restart debt payments with the help of new terms. It will also offer you to improve the history of your payment that will also increase your credit score.

Can Repay at Given Time:

Whenever you apply for a personal loan, you will be able to pay it back into installments. The installments will be decided by your ability of repayment. When you will get a personal loan you will never feel burden because you can easily pay the installments on the given time. It is another option that can help you to improve your credit score.

Things that you need to Focus:

There are some important things that you need to keep in your mind to increase your credit score:

  1. Don’t Apply for Several Loans:

In front of a lender, you shouldn’t show yourself as a person who is hungry for credit. If you will apply for the multiple loans it can badly impact your credit score. For a borrower, multiple hard inquiries are considered really negative.

  1. Carefully Decide your Amount:

It is really essential for you to take a personal loan for an amount that you need. If you are taking a loan to repair your credit score, its amount will become a vital factor. So, first of all, access your need and then apply for the loan.

  1. Make Payments Regularly:

Taking a personal loan to improve your credit score will never help you if you will delay your loan payments. The personal loans, as well as credit cards, are being unsecured, impact most to your credit score. So it is really important to pay your loan payments on time to increase your credit score.

  1. Don’t Prepay the Loan:

If you will take a loan to increase your credit score, you must not pay it back until it matures. A long history of credit is considered really well. So, if you will pay your loan regularly till the longer tenure your credit score will definitely become better.

  1. Don’t Rush to the other Debts:

When you will start to pay your monthly installments against your loan, the credit score will begin to improve and it will make you eligible for the different kinds of loans. This offer may look tempting to you but it may affect the score of your credit in a bad way.

  1. Don’t PrematurelyClose the Loan:

Your creditworthiness that is short or long term will be taken into consideration by your lender. Even if you have an amount to close the debt before your loan will tenure ends. You must need to make sure that you are paying a bulk amount and never close it prematurely.

Advantages of Personal Loan to Improve Credit:

Add Varieties to the Type of Credit:

As you know that there are 5 main factors that play an important role in the improvement of your credit score. These factors are your payment history, the ratio of credit utilization, Length of your credit history, inquiries for new credits as well as credit mix. While the credit mix counts only for the 10 percent of your credit score, where a personal loan will help by making a varied mix of your different types of credit, that creditors, as well as lender, need to view favorably.

Lower Down the ratio of Credit Utilization:

As you know that a personal loan is known as an installment loan, so here the debt will not consider in the ratio of your credit utilization. It’s a calculation of revolving debt which is compared with your available credits.  If you will pay the revolving debt along with your personal loan, it will automatically lower the ratio of your credit utilization that will create a positive effect on your credit score.

Establish your Payment History:

A personal loan is one of the best ways that can help you to increase your credit score if you make your payments on time. Giving full payments on time can help you to establish a good payment history for the future.

A personal loan is not only helpful for the financial emergencies but it is also good to build and improve your credit score. So if you want to take a personal loan to pay to improve the credit score then first you must need to access your need and the amount that you can pay off easily. If you pay your installments with the delay it can badly impact your loan history.


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