Yes, you read that correctly. Contrary to popular belief, getting a personal loan can actually improve your credit score instead of hurting it.
The sooner you take out a personal loan the better, because it takes time to make an impact on your credit score.
Here are 3 ways getting a personal loan can improve your credit score in 2017:
Consolidating your debt is one of the best reasons to get a personal loan but how does it work to improve your credit score?
The first step is understanding how a credit score is calculated. These are the 5 main factors:
- Payment history 35%
- Amounts owed 30%
- Length of credit history 15%
- New credit 10%
- Types of credit used 10%
As you can see, payment history is the most important factor, followed by amounts owed. If you have many unpaid debts, this will negatively affect payment history and amounts owed.
By consolidating your debt, you can substitute multiple high-interest debts with a single, lower-interest loan, using your personal loan to pay off the other debt. This will look good when your credit score is calculated.
2. Decreased credit card utilization
If you use your credit card frequently, this can negatively affect your credit score too. Credit card utilization is the relationship between your credit limit and how much you spend on your credit card each month. The credit bureaus receive a report of your credit utilization on a monthly basis. You should try to decrease your credit balance before the end of the month.
By taking out a personal loan, you can do this. The subsequent lower outstanding credit card balance will have a positive impact on your credit score.
3. Mix of credit
Even though the aim is to reduce expenditure on high-interest credit cards, you don’t want to replace them entirely. Just like diversifying your investment portfolio is a good idea, it’s also wise to create a mix of credit. Types of credit used has a 10% effect on your credit score, so mix up your credit types to positively impact your credit score.
Unlike credit cards and a personal line of credit, both of which are revolving debt, a personal loan is installment debt. Personal loans have lower interest rates than revolving debt, which will have a knock-on effect on your credit score. Being installment debt, personal loans have a fixed loan repayment term. This means less risk as you can’t keep on borrowing as you would on a credit card.
Want to improve your credit score in 2017? Apply now for a personal loan at competitive rates.
The information included in this article is intended to provide information for general purposes only, should not be construed as legal or any other advice on any subject matter and should not be relied upon as such.