4 Reasons a Personal Loan Can Improve Your Credit Score
Looking for a way to raise your credit score? If so, personal loans can help you do so! Many studies have shown that most customers using personal loans to consolidate their debt can increase their credit score by 20 points and more within the first three months of doing so. To you, this might seem a little confusing. How can getting more debt help to improve your credit score? It should be doing the opposite, right? Not necessarily.
Here is how obtaining a personal loan can improve your credit score:
1. It diversifies your credit mix
Much like diversifying your investment provides you more security in terms of earning money, a similar concept applies to your credit mix. The more diverse your credit mix is, the more points you get awarded for your diversification. For example, having three credit cards is not as good as having a single credit card, a mortgage, and a personal loan if you already do not have one. For lenders, this is an indication that you can work with various types of loans.
2. It lowers your credit utilization
In the FICO credit scoring formula, your credit utilization (how much you owe relative to the original balance of your loan) is considered. The more you owe, the lower your score. By consolidating all your credit card debts with a personal loan, your credit utilization is zero. This means your credit card accounts are always open and the balances low, improving your credit score over time.
3. It is treated as installment debts
Revolving debts are something you do not want to deal with for too long in your account. Although they are open-ended and tend to have low monthly payments and flexible repayment plans, they do not score as high as installment debts. Installment debts, on the other hand, are fixed and have higher monthly payments. As such, having them means that you are much more financially sound, resulting in higher credit scores.
4. It only works when you consolidate debt
Keep in mind that, throughout this article, the assumption is that you plan to use personal loans as a way to consolidate debt. This tactic is one of the most effective ways to stay on top of your debts, allowing you to deal with only one.
To lenders, the ability to pay off multiple debts is a good sign, and when you only have to deal with paying off personal loans, it is much easier for you to keep up with your payments.
Understand that a personal loan will not guarantee an improvement in your credit score. If handled incorrectly, it might actually still pull down your score. However, if used wisely as a way to consolidate debt, you can easily improve your score even after a few months.
Just make sure to work closely with the lender to ensure you get the best deal possible without financially straining you. While it may take some time for you to pay off the personal loan fully, it will relieve you of the burden of worrying about too many payments at once and only allow you to focus on one monthly payment.
Shelby Finance Company is a personal loan company in Memphis, offering personal loans and installment loans to those looking for an ethical and trustworthy lender. If you are looking for installment loans for bad credit, reach out to us today and see how we can help!