Three Ways a Personal Loan Can Improve Your Credit Score

At some point, you will probably need to take out a loan. When deciding to lend you money to purchase a home or pay for college, a bank or lender will need to determine your creditworthiness. Your credit score is a three-digit number that represents the likelihood that you’ll repay a debt.  A score of 650 or above indicates good credit history and provides access to higher limits, preferred interest rates and other favorable lending terms. A personal loan is an unsecured debt for a fixed amount and can be part of a strategic plan to improve credit.

Debt Consolidation

A personal or signature loan is often a great way to consolidate debt. This is usually achieved by:

  • Using the money lent to pay off existing higher-interest debt.
  • Combining multiple debts into a single balance to simplify and organize repayment.

With a lower interest rate and lower monthly payment, you can decrease your obligation faster and improve your score. A reputable company that offers signature loans Houston TX can help you get started today.

Good Mix of Credit

Your score is also affected by the kinds of debt you have.  By having different types of debt, you demonstrate an ability to manage a variety of obligations. Credit cards are revolving accounts, while a personal loan is an installment account. You can raise your score by adding a personal loan to your borrowing history. Overall, this has a small effect on the score, but every little bit helps.

Affecting Your Score

The total number of balances also greatly influences your score. Installment accounts generally have a smaller negative impact than that of credit cards, especially for high balances. Paying off a higher-interest, maxed out credit card with a lower-interest signature loan can have multiple positive effects on your score.

Having a high credit score tells a lender that the risk of failure to repay is relatively low. A personal loan can be a great way to raise your score, affording access to higher limits, better interest rates and often, more flexible repayment options.