Have you ever felt like your credit score was totally beyond your control? If so, it’s time to shift your thinking. Truth is, your credit score is just a reflection of the information in your credit report, which is itself a reflection of how you handle your debt. You can’t change the decisions you made in the past to hurt your score, but there’s good news. You can take action to improve it today.
It’s possible that taking out an installment loan could improve your FICO score. While you should steer clear of taking out an installment loan just to build your credit, if you’re in a bind and are looking for a solid financial solution, building your credit with an installment loan could be the silver lining you need.
Installment loans can help improve your credit score by adding on-time payment history to your credit report. They can also broaden your credit mix, which is a credit score factor that considers the types of accounts you own, if you primarily used credit cards in the past.
How Installment Loans Help
There are five categories on your credit report that impact your score. The most important category is “Payment History”. This factor alone accounts for 35% of your score, which is why consistently making all bill payments on time is one of the surest ways to improve and maintain excellent credit.
Another category worth noting when it comes to loans, is “Credit Mix”. This refers to the kind of debts you hold – credit cards, personal loans, student debt, car loan, mortgage loan, etc. The broader your credit mix, the better your score. If you have a lot of debt, taking out an installment loan to consolidate your debt would also help diversify your credit mix.
More Ways to Boost Your Score
Behind payment history, the second most important determining factor in your credit score is credit utilization. Keeping lower balances on the revolving credit lines you carry means less risk of you appearing to scoring algorithms and to lenders considering you for new credit.
Ideally, you want to pay off credit card balances every month. Avoid using more than 30% of your credit limit at a given time. Doing so can start to have a negative impact on your scores. Limiting the amount of credit card debt you take on will reflect favorably on your score due to your ability to manage debt responsibly.
This would be a good place to state that if you have a lot of debt, taking out an installment loan just for the sake of taking out a loan would be unwise as that will add to your total debt and therefore negatively affect your credit score. Even applications for new credit can briefly effect your score in negative way and there’s high risk to taking on new debt without the means to pay it off.
However, if you are already in the market for an installment loan to buy a home or attend university, improving credit can be a valuable secondary outcome of taking out a loan. Make sure to pay all monthly payments on time so you get the most out of the credit-boosting opportunity an installment loan provides.
