How to Improve Your Credit with a Personal Loan

credit score

Taking out a personal loan may help your credit score.

You probably know how to improve your credit with a credit card. You might even know how to improve your credit several ways other than using a credit card. But do you know how to boost your credit with a personal loan?

If you’re planning to try using a personal loan to improve your credit score, there are both benefits and downsides to doing so. If you go about it the right way, however, it can be a helpful way to raise your credit.

“When it comes to improving credit scores, a personal loan may be a viable option for reestablishing creditworthiness when the proper steps are taken,” Marco Carbajo, Founder of BusinessCreditBlogger.com, said. “For a personal loan to have maximum impact to an individual’s credit scores, you should focus on three key things: maintaining a positive payment history, paying more than the minimum amount due each month and reaching a low balance owing (below 30%) as soon as possible.”

If you adhere to these three conditions, a personal loan might be worth your time. As Gerri Detweiler, Director of Consumer Education at Credit.com said in an article, a personal loan can consolidate credit card debt and improve your credit score for several reasons. Because a personal loan is an installment loan, debt on that loan won’t hurt your credit score as much as debt on a credit card that’s almost to its limit, thereby making available credit more accessible. A personal loan can also help by creating a more varied mix of credit types. Finally, a personal loan can decrease debt more quickly.

But be sure to treat a personal loan with caution.

“Personal loans can be helpful for consolidating debt, but only if you choose one carefully,” Detweiler said. “Look for a lower interest rate than what you’re paying now and a repayment period of three to four years. If you use the loan to pay off credit cards, be sure not to run up new balances on those cards.”

In addition, decide whether a secured or unsecured personal loan would be best for you ahead of time. According to CreditLoan.com, a secured personal loan has a longer repayment time and lower interest rates. The downside to this type is that you must provide an asset, such as a car, as collateral for the loan. An unsecured personal loan has a higher interest rate and is more difficult to obtain but is better for people who do not want to provide collateral. In general, secured loans are better for the long term, and unsecured loans are more beneficial in the short term.

According to Anthony Gaalaas, the “Credit Expert,” you can take out a personal loan starting at $500, depending on the bank. When the loan appears on your credit report, your credit score might drop for the first month, which Gaalaas says is normal. After that first month, your credit score should start to improve if you make payments on time.

“The most significant pro regarding personal loans is they can be used to pay off expensive credit card debt,” said John Ulzheimer, President of Consumer Education at SmartCredit.com. “While you would still owe the same amount of money, your credit scores would likely improve.”

Photo courtesy of Casey Serin