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man smiling after looking at his higher credit score on his laptop

3 Ways Personal Loans Can Improve Your Credit Score

Posted by Carolina Trust Federal Credit Union on Jul 14, 2021 10:00:00 AM

When hard-working community members suffer financial hardships or lack cash-on-hand resources, Personal Loans remain a go-to solution. Personal Loans, also known as Unsecured Loans, can be put to work resolving the little curves life throws at all of us. But one of the things that makes some responsible people apprehensive about applying is that they believe a loan could lower their credit score. When the repayment process is managed well, taking out a Personal Loan can actually improve your credit score. If that seems counterintuitive, consider the following.

What Are Personal Loans?

Personal Loans are set amounts of money that people can borrow for wide-reaching purposes. Credit Unions, Banks and online lenders offer secured and unsecured loans that can be put to immediate use and paid back over time. Personal Loans can help everyday people resolve financial setbacks, improve quality of life, or streamline things such as high-interest credit card debt into a single monthly payment. These rank among the common reasons community members apply for Personal Loans.

  • Relocation Expenses
  • Credit Card & Debt Consolidation
  • Necessary & Elective Medical and Dental Procedures
  • Weddings, Graduations, & Special Events
  • Home Improvements & Repairs
  • Funeral Expenses
  • Paying for a Dream Vacation
  • Vet Bills

Unlike home mortgages and secured loans, many of the products lenders offer are unsecured loans driven by credit scores. The interest rate a borrower earns is usually based on an average credit score, ability to repay the long- or short-term loan, and other factors. It’s also essential to distinguish Personal Loans from Personal Lines of Credit. The latter typically functions like a credit card that borrowers use incrementally over time. Personal Loans are lump-sums that are repaid over years in static monthly payments. When paid on time, they can help people improve their credit.

personal loan for a family

A Personal Loan Can Help Your Credit

It’s not uncommon for fiscally responsible people to view borrowing as a credit score negative. It may sound odd, but the exact opposite may be true. Credit scores are calculated by hard-and-fast metrics that include debt and repayment. Unless someone incurs and repays a debt, their credit score may not necessarily have the legs to climb into the upper rankings. That being said, these are three ways that Personal Loans can help boost your credit score.

Better Credit Mix

A healthy credit mix typically includes credit cards, secured and unsecured loans that are paid back on time. One of the credit score metrics looks at borrowing and repayment diversity. If someone has one credit card or the only loan they take out is to buy an automobile, their credit score may not be equal to their actual ability to borrow.

Demonstrate Repayment Ability

The second aspect of a credit score calculation involves a person’s repayment history. Missed or late bill payments typically cause credit scores to decline. By that same token, on-time payments and completion of a Personal Loan generally improve a credit score.

Reduce Debt-To-Income Ratio

When borrowers leverage a Personal Loan to bring multiple credit cards and loans under one roof, they increase their credit capacity, which may have a positive impact on their score. This strategy involves transferring high-interest debt and numerous bills into a single manageable monthly payment. Personal Loans have the potential to fast-track people out of debt.

Beware: Personal Loans Can Also Hurt Your Credit

Although Personal Loans can boost your credit score, it’s essential to keep in mind that when used incorrectly, they have the potential to do the opposite. These are three things to remember when you are considering securing a Personal Loan.
Credit Pulls Can Affect Your Credit: One of the lesser-known facts about credit scores is that repeated hard inquiries have the potential of lowering your rating. Applying to a variety of lenders might result in a lower score which can reduce your ability to borrow and reduces access to more reasonable interest rates. Limit your loan applications to realistic options.

You Need A New Plan

Taking out a Personal Loan is most effective when you manage spending responsibly. For example, securing a loan to consolidate debt is only a fruitful strategy if you don’t keep swiping credit cards. It’s crucial to have a debt management plan when taking out a Personal Loan so you stop creating more debt.

Excessive Fees

Borrowers would be wise to read the so-called fine print. Some predatory lenders charge exorbitant application and processing fees. Reasonable lenders charge only nominal fees or none at all. Even if your credit isn’t the best, make sure you check with your local Credit Union or Community Bank before reaching out to Payday Lenders.

When Are Personal Loans Helpful?

Personal Loans can be game-changers for people struggling with credit card debt, needing emergency resources for medical procedures, or are experiencing a financial shortfall. It’s also not uncommon for people to use Personal Loans to fund weddings, graduations and replace an HVAC system that suddenly fails. In essence, Personal Loans are a go-to resource that can help get you through good times and bad.

Where Can You Get A Personal Loan?

There are wide-reaching resources available to people who are considering Personal Loans. Your local Credit Union or Bank may have the perfect product to fit your needs. Online lenders have evolved in recent years, and their ability to compete with traditional institutions makes them worth considering.

If you are looking for a Personal Loan to help your financial situation, start by asking your local loan representative to take a look at your finances and go over the pros and cons to see if it is the right solution for you. Once your decision is made and you are ready to move forward, complete the fast online application. If approved, the money can be transferred right into your account.

At Carolina Trust Federal Credit Union, we know that sometimes you need a little extra money for anticipated and unexpected life occurrences, and we get it. Whatever it may be, don’t worry— we’ve got a loan for that.

personal loan guide

Topics: Personal Finance, Credit Building, Personal Loans

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