There are many ways to improve your credit score, with some being quite interesting. Did you know, for instance, that people without kids and those who own iPhones tend to have healthy credit scores? Well, there’s another way in which you could improve your credit score that you might not have considered: taking out a personal loan.
The average credit score in the U.S.. was 695 in 2015, which isn’t that great. A healthy credit score should be at least over 700, while anything over 800 is seen as excellent. At first glance, taking out a personal loan and achieving a healthy credit score are ideas that seem to clash – you’re likely to assume that taking out a personal loan means that your credit score takes a bit of a smash because you’re adding debt to your financial portfolio. But the reverse can be true. Here are three ways in which personal loans can actually improve your credit score.
1. You Lower Your Credit Utilization
A personal loan is an installment arrangement – it has a fixed term of repayment, unlike credit cards which have no fixed payment terms. When you get a personal loan instead of adding credit card debt to your life, you lower your credit utilization. This is the relationship between how much credit you have and how much of it you spend, and naturally it should be as low as possible. For instance, if you have a limit of $11,000, you shouldn’t spend more than 30 percent of that in a month, which would be $3,300. Since you’re paying a fixed amount on a personal loan, you’re lowering your credit utilization and boosting your credit score.
2. You Get A Good Track Record
Lenders won’t know if you’re worth giving a loan to unless they see proof that you have a great track record of paying back credit and loans. Credit borrowers tend to have a credit score of over 700, with the minimum requirement for loans floating around the 640 mark, as stated in the Best Egg Personal Loans Review (Updated for 2017). That’s why having a personal loan can be a great way to earn your credit worthiness. When you make your loan payments on time and do this consistently over months and years, lenders will see that your credit score is rising nicely. This will help you gain personal loans in future. You never know when you’ll desperately need one so having a pristine loan payment in plan will serve you well.
3. You Can Wipe Out Credit Card Debt
If you have credit card debt, it can be a good idea to convert it into a personal loan. This is said to boost your credit score by approximately 100 points, while lowering the amount of interest you’ll pay on your debt. You can expect to pay an average of 11 percent interest on a personal loan, when compared to over 13 percent on credit cards. How switching from credit card debt to a personal loan works is that it ensures you don’t use your credit cards. This can help you take control of your debt, minimize future debt, and lower your spending – which all help to keep your credit score at a healthy place.
Improving your credit score is a must to ensure that you can get loans when you need them, and taking out a personal loan can help you achieve a healthy credit score to begin with. It can lower your credit card debt, boost your credit track record, and decrease how much credit you actually use. These all go a long way to helping you manage your money and credit score, for a healthier financial portfolio as you age.
