Our credit scores are alive, changing every day affected by our behaviors and spending habits. If you’ve managed to achieve a good credit rating, you’ll have amazing credit available to you with affordable interest, but on the other hand, bad credit brings fewer credit options and higher interest. If you fall into the latter category and want to improve your credit, here is how you can do that using a personal loan:
Benefits of a personal loan to your credit score
It’s possible that a personal loan can improve your credit score, and here’s how:
1. Minimizing your credit utilization ratio: With a personal loan that consolidates your debt, it’s possible to lower your credit card utilization. By using this type of personal loan, you can iron out your credit card balance and show your unused credit.
2. Diversifying your credit mix: to show the lender that you can manage different types of credit products, it’s a good idea to mix different types of credit. If you have a credit card and a personal loan that you managed to handle with responsibility, it leaves a good impression on the lender.
3. Reporting positive payments to the bureaus that make our credit score: If you take out a personal loan and make consistent payments in time, this positive activity will be reported to all the credit bureaus. Check your score online by tracking your credit using various options.
Here’s one important thing to know when applying for a personal loan: the lender will do something called a ‘hard-credit inquiry’ which is a process of evaluating your credit and its worth. This process can take down a few credit score points for some time, but if you get approved, the positive impact will be more than worth the sacrifice. There are also ways to erase these inquiries if you don’t want them on your record.
Debt consolidation loan
This type of loan is a personal loan used for taking care of your debts that might be messing with your credit score. Let’s say you have three credit cards with three debts you own. Instead of paying three separate payments per month, all with different interest rates, you can take a consolidation loan that will allow you to pay off the three debts on the credit cards. The way you pay off the consolidation loan is beneficial because it only brings one payment a month. And if you choose a good lender like reputable Jacaranda Finance, you can even expect lower interest rates and a way to save money while fixing your credit score. Your lender will help you settle the balance on your credit cards and lower your credit utilization ratio. It also allows you to boost your credit mix (credit-scoring models prefer a variety when it comes to revolving debt).
Alternative ways to improve your credit score
While a personal loan for debt consolidation is one way to boost your credit score, it’s not the only one. There are various alternatives, all with their respective pros and cons. For instance, you can get a secured credit card—a special type of credit card that only spends funds from a specific account. The limit on this card usually depends on the security deposit you make from the start, when applying for the cards. If you miss payments, you will lose your collateral, so unfair lenders often choose to sell this type of credit card to people with not-so-good credit. But, if you manage to make everyone on time, your score could benefit greatly. There’s something similar to personal loans called a credit-builder loan. This type of loan is specially made for people who want to improve their credit score. It works in the following way: instead of giving you a cash loan, the lender (an online lender or a credit union lender) will deposit the money into a secured savings account. Then, you’re obliged to make monthly payments after a specified period of time and the lender will report your progress to all the major credit bureaus. When the period of payment is through, you’ll receive the loan plus all the interest from your savings account over time.
Personal loans can be great if you want to improve your credit score by removing debt or building a responsible credit history. However, make sure to use a responsible lender that will give you fair rates. Also, don’t hesitate to read a bit on any risks that you might come across on the way. If you get a cheap loan from a trusted lender, you can soon end up with a stellar credit score and a ton of credit opportunities.