3 Ways Personal Loans Can Improve Your Credit Score
When hard-working community members suffer financial hardships or lack cash-on-hand resources, personal loans can be a good solution. Personal loans, can help resolve the little curves life throws at us. One of the things that makes some people apprehensive about applying is that they believe a loan could lower their credit score. When the repayment process has reasonable terms, taking out a personal loan can actually improve your credit score. If that seems counterintuitive, consider the following information.
What Are Personal Loans?
Personal loans are set amounts of money that people can borrow for a variety of purposes. These loans can help everyday people resolve financial setbacks, improve their quality of life, or streamline things such as high-interest credit card debt into a single monthly payment. Here are the most common reasons to get a personal loan:
- Relocation Expenses
- Credit Card and Debt Consolidation
- Necessary and Elective Medical Procedures
- Weddings, Graduations, and Special Events
- Home Improvements and Repairs
- Funeral Expenses
- Paying for a Dream Vacation
Unlike mortgages and secured loans, personal loans are driven by credit scores. The interest rate a borrower earns is usually based on credit score, ability to repay the long- or short-term loan, repayment history and other factors. It’s also essential to distinguish personal loans from personal lines of credit. The latter typically functions like a credit card that borrowers use incrementally over time. Personal loans are lump-sums that are repaid over years in fixed monthly payments. When paid on time, they can help people improve their credit.
A Personal Loan Can Help Your Credit
Credit scores are calculated by metrics that include debt and repayment history. Unless someone incurs and repays a debt, their credit score may not necessarily climb into the upper rankings. Here are three ways that personal loans can help boost your credit score:
- Better Credit Mix: A healthy credit mix typically includes credit cards, secured and unsecured loans that are paid back on time. One of the credit score metrics looks at borrowing and repayment diversity. If someone has just one credit card or the only loan they take out is to buy an automobile, their credit score may not be equal to their actual ability to borrow.
- Demonstrate Repayment Ability: The second aspect of a credit score calculation involves a person’s repayment history. Missed or late bill payments typically cause credit scores to decline. By that same token, on-time payments and completion of a personal loan generally improve a credit score.
- Reduce Debt-To-Income Ratio: When borrowers leverage a personal loan to bring multiple credit cards and loans into a single payment, they can more easily reduce their debt-to-income ratio. This strategy involves transferring high-interest debt and numerous bills into a single manageable monthly payment. Personal loans can help fast-track people out of debt.
Beware: Personal Loans Can Also Hurt Your Credit
Although personal loans can boost your credit score, it’s essential to keep in mind that when used incorrectly, they have the potential to do the opposite. These are three things to remember when you are considering securing a Personal Loan.
- Credit Pulls Can Affect Your Credit: One of the lesser-known facts about credit scores is that repeated hard inquiries can lower your rating. Applying for a loan from multiple lenders can result in a lower score which diminishes your ability to borrow and can limit access to more reasonable interest rates. Limit your loan applications to your primary financial institution or a local lender like your credit union.
- You Need A New Plan: Taking out a personal loan is most effective when you spend responsibly. For example, securing a loan to consolidate debt is only a positive strategy if you stick to a budget. It’s crucial to have a debt management plan when taking out a personal loan so you don’t create more debt.
- Excessive Fees: Be sure to read the fine print (disclosures). Some lenders charge exorbitant application and processing fees while others charge nominal fees or none at all. And while this won’t hurt your credit, it’s important to be aware of any fees you will have to pay. Even if your credit isn’t the best, make sure you check with your credit union before reaching out to a Payday Lender.
When Are Personal Loans Helpful?
Personal loans can be beneficial to people struggling with credit card debt, needing emergency resources for medical procedures, or are experiencing a financial shortfall. It’s also not uncommon for people to use personal loans to fund weddings, graduations or even replace a HVAC system that suddenly fails. In essence, personal loans are an option that can help get you through good times and bad.
Where Can You Get A Personal Loan?
There are a variety of resources available to people who are considering personal loans. If you think a personal loan may be the right fit for your financial situation, please call 770.580.6000 to speak with one of our Lending Specialists. We will help you review the pros and cons for each available solution and if a personal loan is the right fit, we will work with you to get you the money you need, fast.