Taking out a personal loan can be used to improve your credit score if used responsibly. Improving your credit score is heavily influenced by how well you manage your budget; if you can comfortably afford to take out a loan, it can be an effective way to build your credit. However, taking out more than one personal loan at one time can put increased financial pressure on your budget. If you are thinking about using a personal loan to build your credit score, here is everything you should know.
Personal loans are great for their flexibility both in their repayment terms and what you choose to use your loan for. Unlike a credit card, you have pre-determined repayments clearly outlined to you to be paid over an agreed period of time. This solid structure can avoid extra fees and charges for defaults or late payments.
Additionally, a consolidation loan is a type of personal loan used to simplify all of your loan repayments into one simple payment. This can save you money on paying different interest rates and juggling multiple payments that likely fall due on different dates. You can use a consolidation loan to collate any credit you have, including credit cards or lines of credit.
Here are some clear ways that you will positively impact your credit score using a personal loan:
A personal loan can be a great tool to improve your credit score if managed effectively. Some tips to avoid becoming stressed or overwhelmed by a personal loan can include:
There are some instances of poor loan management in which you could damage your credit rating. It is important to understand these instances so that they can be avoided.
When you submit a loan application with a lender, they will conduct a credit check which lodges a ‘credit inquiry’ on your credit report. If you submit too many loan applications within a short period of time, these will all appear on your credit report. This can put a ‘dip’ in your credit score. If you were rejected for a personal loan, it may be beneficial to find out why before applying for another loan.
If you end up missing your repayments, or eventually defaulting on the loan, this will likely damage your credit score and make it more difficult for you to access financial assistance in the future.
Each time you take out a loan, it reduces the average age of your accounts, which can slightly decrease your credit score. For example, if you have had a credit card for 10 years and a car loan for 3 years, your average age of accounts is 6.5 years. If you then add a personal loan, the average goes down to 4.33 years.
Taking out a personal loan is not the only way you can build your credit. You may wish to consider these options alternatively or in conjunction with a personal loan.
A secured credit card is a specific credit card that uses money you have already set aside to serve as collateral against the line of credit. The limit is based solely on the size of the security deposit you made when you applied for the card. Because you have collateral on this card, and you would subsequently lose this if you missed your repayments, lenders are likely to offer this kind of credit card to you even with bad credit.
Co-signing a loan or credit card can also build your credit because you are sharing responsibility for the loan. If you and your account holder both make regular repayments, you can both benefit from your joint account. However, if the other account holder misses their repayments, not only can this negatively affect your credit score but you will be held responsible for making their missed payments.
Overall, it is clear that a personal loan can help build your credit if you consolidate your debts and/or establish a consistent payment history. Nifty Loans offers quick cash loans to eligible applicants from $300 to $10,000. Nifty Loans is an online lender, which allows us to deliver extremely fast and efficient service. We are one of Australia’s fastest lenders; we often deliver loan outcomes within 60-minutes and support instant transfers on approval.Apply Now
Since founding Nifty in 2016, Bell has continued to make waves within the local financial sector for his continued ambition and willingness to adopt emerging technologies.Read More