Installment loans might help you raise your credit score because they give you a longer history of on-time payments. Credit cards can also raise your credit mix, a component of your credit score that takes into consideration the many types of accounts you have.
The short-term impact on your credit score of taking out an installment loan should be taken into consideration while considering whether or not to take one out. For example, consistent, on-time payments can help you boost your credit score over time.
Find out how an installment loan can help you improve your credit in the following paragraphs.
Installment Loans: What Exactly Are They?
Installment loans require payments to be made on a regular basis, usually on a monthly basis, over a specified length of time. You’ll have to pay interest on a loan if you don’t get an introductory 0% APR financing agreement from the lender. If you default on the loan, the lender may seize whatever collateral you’ve put up as security. Mortgages, student loans, personal loans, and auto loans are all types of installment loans.
Credit cards, on the other hand, are a form of revolving credit. Revolving credit accounts allow you to borrow money and pay it back over time, unlike installment credit.
As an illustration, you may obtain a credit limit or credit line of $10,000 by taking out a $10,000 installment loan and repaying it over five years with a credit card. Interest will be imposed on any unpaid balances at the end of each month.
You can raise your credit score by taking out an installment loan.
Your payment history accounts for the lion’s share of your FICO® Score. Paying your bills on time, which accounts for 35% of your credit score, will help you build and keep an excellent credit rating.
In order to raise your credit score, you must pay your installment loans on time every month for a long period of time. Every late payment has the potential to lower your credit score, so be mindful of this fact. Using automatic debit as a payment method will help you avoid missing a payment.
Minor, but still significant, factors in your credit score are the credit mix. Installment loans can help you raise your FICO score if you’ve only ever used credit cards in the past. The FICO score algorithm takes into account both installment and revolving credit.
Only 10% of your FICO® Score is accounted for by the mix of your credit cards. A bad approach is to take on additional debt just to improve your credit mix due to the severe implications of taking on credit you cannot handle.
Boosting Your Credit Rating
When it comes to your credit score, how much of your available revolving credit you actually use in contrast to your credit limit is the second most crucial aspect. Credit scoring algorithms and lenders see lesser balances on revolving credit lines as a sign of reduced risk.
Credit scores can be lowered if you use more than 30% of your credit limit at any given moment. Your credit card bills should be paid in full each month. Your credit score will reflect your ability to manage debt if you keep your credit card debt to a minimum. FICO® Score calculations include installment loan balances as part of “amounts owing,” however only revolving accounts are included in credit usage. When applying for certain types of credit, lenders may take into account your debt-to-income ratio, which is affected by the amount of money you owe on your installments (such as mortgages).
Improve Your Credit by Taking out a Payday Loan
Only apply for as much credit as you actually require. A new loan will temporarily lower your credit score, so avoid taking on new debt if you don’t have the resources to pay it back.
An additional benefit of taking out an installment loan from OakParkFinancial is that it might help you improve your credit score, even if you didn’t intend to use the money for that purpose. Make all of your monthly payments on time to take advantage of the credit-building opportunities that an installment loan gives.
Senior Personal Finance Writer at Oakparkfinancial
Luke Pitt writes with a simple and field-level perspective on personal finances. He learned to save money as he completed the B.S. Degree from the Department of Politics Science from Florida State University. Luke has worked with student loans as well as inexpensive housing options, budgeting that includes auto loans, and other personal finance issues that are common to all Millennials after they have graduated.