In the United States, the average credit score is 687. Since the maximum credit score is 850, that leaves much room for improvement.
If you fall into this average category, you might be wondering what you can do to improve your credit score. Some people believe paying off an installment loan can help them improve their credit score.
Read on to learn the scoop.
What is an Installment Loan?
Before you learn whether or not an installment loan can help boost your credit, it’s important you know what it is.
When you borrow a set amount of money and you agree to pay it back plus interest in equal installments, it’s called an installment loan. If you have ever taken out a car loan, then you might already be familiar with an installment loan.
Credit cards, for example, are not installment loans since the amount you pay is different every month and there is no end date.
How You Can Improve Your Credit?
If you want to consider an installment loan to help your credit, there are a few ways you can do so.
Better Credit Utilization: A way an installment loan can help you reduce your credit score is if you have a lot of credit card debt.
When most of your credit cards are maxed out, your credit utilization ratio will work against you. As a rule of thumb, you want your credit utilization to stay below 30 percent.
If you free up your credit utilization, you could see an improvement to your credit score.
Diversifies Your Debt: When FICO and other credit bureaus put together your number, they look at your overall debt.
Having a credit mix accounts for 10% of your credit score. A diversified credit mix will include mortgages, credit cards, student loans, car loans, and more.
If you only have credit cards and you add an installment loan, you will diversify your debt and improve your credit score.
Always Pay on Time: If you make the effort to always pay your installment loan on time, you will improve your credit score. When your credit history reflects all of your payments on time, it can have a positive impact on your credit score.
However, if you default on your loan, it will have the opposite effect.
Save Money in the Long Run: If you get an installment loan to pay off other debts and improve your credit score, you will see significant savings.
Once your credit score improves, the next time you need to request a loan or credit line, you will qualify for a lower interest rate. A lower interest rate means more money in your pocket.
Since installment loans only take a few years to pay off, you will not have to pay interest forever.
How an Installment Loan Can Help Your Credit
Now that you know the ways an installment loan can help you improve your credit score, it’s time you do your research.
Want to learn more about what installment loans can do for you? Click here to learn more.
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