A personal loan is an option that helps you make ends meet when times get tough financially. Yet, you can also take advantage of your need for a personal loan to improve your credit score. While building an excellent score takes time, the payoff is worth it when you enjoy perks such as faster approvals and lower interest rates.
As you explore the benefits that a personal loan offers for your future
1. Only Request What You Need
Ideally, a personal loan should be in an amount that helps you pay for a current need, yet it must be small enough that you can keep the payments manageable.
Start by identifying your financial needs. Your personal loan can be used to pay another debt, cover school costs such as tuition, or for emergency situations such as car repairs. Calculate the estimated costs for your needs so that you have a total in mind before you apply for the loan.
2. Avoid Falling Behind on Current Debts
When an emergency arises, such as needing to replace a home appliance, you may be tempted to skip other payments to raise the money to cover the cost. However, a personal loan helps you avoid falling behind on current debts that could have a negative impact on your credit score.
3. Diversify Your Accounts
Your credit score is calculated using several different factors that include the types of accounts that you have on your history. For example, credit cards are counted as revolving debt, while a personal loan may be included on your history as an installment loan.
Typically, your ability to handle multiple types of accounts reflects positively on your credit score. If you do not currently have installment loans such as a mortgage or student loan in your history, then a personal loan can help add diversity to your accounts.
4. Calculate Your Monthly Payments
Before you sign a loan agreement, you must make sure that you can manage the payments. You can use online calculators or work with a reputable lender to figure out how much your payments will be each month. Then, work this amount into your budget to make sure that it is affordable with your income and current expenses.
5. Make Payments on Time
Once you take out a personal loan, you have a new opportunity to demonstrate responsibility to the credit reporting agencies by paying your bill on time. Set up automatic payments or schedule an alarm on your calendar to remind you when each payment is due so that you never miss a payment.
6. Consider Consolidating Accounts
Credit cards and other types of debt sometimes carry high-interest rates that make it harder to pay them down. Depending upon your financial situation, you may find it beneficial to consolidate your debt using a personal loan that carries a lower interest rate.
Once you consolidate your debt, you can use the money that you save on interest each month to pay the loan down faster so that you achieve a lower credit utilization score.
7. Avoid Taking on Additional Debt
Your credit score is also based upon your total debt-to-income ratio along with the length of your accounts. While you use your personal loan to improve your score, avoid taking out other debts that could interfere with these factors. Instead, focus on paying off your personal loan so that it has the greatest impact on your score.
At First Southern Services, our primary goal is to help you make the right decisions to enjoy greater financial freedom. Contact us today to learn more about how you can use personal loans to improve your credit score.
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