Before you try to enhance your credit score by seeking various types of credit, make sure you really need to do this. The FICO score you have depends on several factors, including:
- Payment history
- How much you owe
- The length of your credit history
- New credit
- The types of credit you have
Online loans are a popular form of alternative credit because they can help to boost your credit score. However, you may wonder if this is the right option for you.
The general rule regarding these loans is that you don’t need to take one out just for this purpose.
Do You Need the Loan?
Unless you find online loans that carry a zero percent interest rate and that you are confident you can repay, you need to stay away from new credit, especially if you don’t need it. However, there are some situations where these small, low-interest loans are beneficial.
It’s Often Cheaper than Other Types of Debt
A good reason to consider internet loans is if you can find one for debt consolidation purposes. These loans typically have longer terms, lower rates, and higher limits than most credit cards. If you can get the loan and use the money to pay off or pay down your other debt, it is extremely beneficial. Many credit cards have interest rates up to 24.99%, while online loans offer rates in the eight to 10% range.
In this situation, online loans make a great deal of sense and can help boost your credit rating.
Credit Rating Threshold
If you have found your credit rating is on the edge of moving up from “Good” to “Excellent” or even “Poor” to “Good,” then online loans are also beneficial. This is only the case if you can get a small installment loan with a low-interest rate you can repay quickly. This can give your credit score that little boost it needs to get you over the threshold.
Are you buying a home soon? If so, keep in mind that a simple five point difference (i.e. 635 to 640) in your credit score can impact your ability to secure the mortgage loan with a low-interest rate. An online loan can do this if you pay it off on time.
While online loans aren’t right for every situation, they offer many benefits if you are trying to increase your credit rating. Make sure you learn everything you can about the loan you are considering to ensure it is going to help, rather than hurt, your credit score.