Is it possible to improve your credit score via a personal loan? After all, a loan typically means more debt, isn’t it? Here’s what the experts say – when you use a personal loan to consolidate debt, you may be able to boost your credit score.
It’s a renowned fact that a good credit score can help you get approved for a personal loan. Your credit score determines the interest rate you pay on your loans. Not only this, even the banks provide much lower interest rates to people with high FICO scores.
Taking a personal loan can be beneficial in a plethora of ways. Whether you’re going on a vacation, renovating your home or planning a dream wedding, a personal loan can lower your credit card debts and help you pay off unexpected expenses, thus taking the financial stress off your shoulders.
I would like to share my personal experience with you guys!
My wife and I bought a new house last July, and while we were going through the home buying process, I was curious about what role my credit score would play in getting a personal loan and how it would be affected once we get the loan. Of course, I knew that in order to get approved for a loan, I needed a good credit score, especially in the current economic scenario. But I didn’t know how getting a personal loan would affect my credit score. I contacted a reliable commercial & residential property loan provider in California for the same, and here’s what I found:
The best ways to keep your credit score up and in good shape is by:
- Keeping up with your payments;
- Maintaining low balances;
- And, retaining credit accounts for long periods of time.
The way a personal loan affects our credit score depends primarily on our specific credit history. There are five factors that could either hurt or boost your credit score, with each one contributing to your score differently:
- Payment history (35%)
The first and the foremost thing any lender would question about is whether you can be trusted to repay funds that are lent to you. This is the largest component of your credit score as it evaluates whether you’ve paid your past credit accounts on time or not. The later you pay, the worse it is for your score. Furthermore, if you have any charge-offs, debts settlements, bankruptcies, foreclosures, or public judgments against you, then it will be a red flag to potential lenders that you might not pay them back. In such as scenario, your credit score could get adversely affected.
- Amounts owed (30%)
So, you’ve made all your credit payments on time, but what if you’re about to reach a breaking point? FICO scoring analyzes your Credit Utilization Ratio, which measures the amount of debt you owe against your available credit limits. This component of your credit score takes into account various factors, including the total available credit you have used, the amounts you owe on specific types of accounts such as a mortgage, auto loans, credit cards and installment accounts, etc., and the amount you owe in total.
There’s a misbelief among people that they need to have a zero balance on their accounts in order to improve their score. Well, that’s not the case. Owing less is far better than owing nothing at all as lenders always look for those applicants who borrow money and responsibly pay it back on time within the terms of the loan.
- Length of credit history (15%)
Another important component of your credit score is the length of your credit history, which accounts for 15 percent of your score. The longer the credit history, the greater the credit score. However, people who haven’t been using credit for long may have a higher score, depending on how the rest of their credit report looks like, according to FICO.
Your credit score takes into account for how long your credit accounts have been established. This includes the age of both your oldest and newest account as well as an average age of all your accounts. Apart from that, it also takes into consideration the number of years your specific credit accounts have been established. While a long credit history is always beneficial, a short history works fine as well, on the assumption that you’ve made your payments on time and didn’t owe too much.
- New credit (10%)
Your credit score considers the number of new credit accounts (by type) you have. Nowadays, people tend to have more credit and shop for new credit more often than ever. However, studies show that opening numerous new credit accounts too rapidly represents greater risk, especially for those who have a short credit history.
Opening new credit accounts in a short period will lower your average account age, which in turn will have a negative impact on your credit score. Even if you’ve been using credit for a long time, opening several new credit accounts can still lower your credit score.
- Types of credit in use (10%)
Last but not the least, your credit score will consider your mix of credit cards, company accounts, installment loans, and mortgage loans. While it’s not necessary to have accounts in each of these categories, it’s always advisable not to open any such credit accounts that you don’t intend to use.
In simpler terms, getting different types of loans also helps your credit. If all of your loans are credit cards, it’s acceptable, but your credit mix would be better if you also have an auto loan or a home loan.
Long story short, getting a personal loan can be a great way to improve your credit score, but only if you use them wisely. Taking out any debt always come along with a substantial amount of risk, and that is why it’s advisable to take this decision prudently. There is a myriad of ways to use a personal loan, which include consolidating debts, improving your debt-to-credit ratio, and reducing your overall debt more quickly. If you’re looking for a commercial & residential property loan provider in California, US, then look no further. We’ve got you covered!