The average credit score in the US is between 673-695. Having a poor credit score can bar you from countless financial opportunities like a good mortgage and reduce your buying power. One strategy is to use a personal loan to build credit.
Using a Personal Loan to Build Credit
A personal loan can be a viable option to build your credit if no other options are available to you. We’ll go over how they can help your credit and a little bit about how credit scores work.
How Personal Loans Can Help Your Credit
A personal loan, along with any other kind of credit you can get, can help build your credit score and improve it when used responsibly.
Here are 5 factors that personal loans can improve.
Your Payment History
If you are approved for a personal loan, it can give you the opportunity to showcase that you, in fact, are a responsible borrower. Regular, monthly payments paid on time can help you establish a track record over time, which shows financial institutions that you can afford to use and apply for credit. This is the most important factor when you’re looking to build and improve your credit score.
Credit History Length
The longer amount of time you have access to credit (along with responsible use and making payments on time) the stronger of a case you make to have a higher credit score.
Mix and Types of Credit
If you have a limited credit history, varying your types of credit can help you improve your credit score. These types can be both secured and unsecured loans, including credit cards, mortgages, and personal loans.
It’s advised to not use over 30% of your total credit, but it’s important that you do in fact use your credit. How much debt you have, including the type and the amount, can showcase how well you can manage your total credit.
It’s important to emphasize that credit usage should be used responsibly. As long as your debt doesn’t get out of control and you use only what you can afford, it can be a powerful indicator of responsible credit borrowing.
Recent Credit Inquiries
Another factor that can influence your credit score is any recent credit you’ve applied for. Any sort of credit that you apply for, the institution that you go through may run a hard inquiry on your credit, which can lower your score by a few points. It’s important to clarify with the lender in question what sort of inquiry they will run on your credit profile.
If you end up getting an inquiry, it shouldn’t affect your score in a big way. Even if your score gets dinged a few points, it usually recovers after a few months. In general, the other factors have a much bigger influence on your entire score, so it’s important to handle those factors first.
Sensible, Personal Finance Advice
Having good credit can open up a lot of financial opportunities in your life. If you’ve been struggling with bad credit one can use a personal loan to build credit, as long as it’s used strategically. If you’re looking for more personal finance advice, feel free to check out our blog.