Installment Loans to Rebuild Credit: How to Use Them to Your Advantage

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Credit issues are a major problem for a growing number of people. In fact, more than one-third of Americans have credit scores at or below 601. That’s where the credit bureaus draw the line between “fair” and “bad” credit. And if you have bad credit, getting the money you need to buy a house, a car, or even qualifying for an apartment is tough at best. But you don’t have to settle for a low credit score. Nor do you necessarily have to pay for a credit repair company to come to the rescue. It can be as simple as taking out installment loans to rebuild credit. Going into debt to improve your credit score might seem a bit counterintuitive. But it works as long as you understand how it works. Here’s how installment loans can help.

Establishes a Credit History

If you’ve never had to borrow money before or opened a credit card, you have little to no credit history associated with your Social Security number. This makes it hard to get larger loans in the future and can even keep you from getting some jobs.

Installment loans both rebuild credit and build it from the ground up. You’re borrowing money from a lender and paying it back. This process establishes your credit history and helps you build your score over time. And you don’t even have to have a credit card to do it!

Helps You Diversify Your Debt Portfolio

Having a credit card is great, but lenders often look at your entire debt portfolio when evaluating your creditworthiness. And having more than just a credit card on your history can help. Why? Because all debt gets treated differently.

For example, it’s often easier to qualify for a credit card when you have poor credit or bad credit history. Loans of any kind are typically harder to qualify for. But personal installment loans help.

Personal installment loans are often smaller and thus easier to qualify for. And once you take one out and start making payments, that activity gets reflected on your credit history.

This can help you qualify for larger loans in the future.

Lowers Your Overall Credit Utilization

Credit bureaus base your score on a number of factors and one of the most important is your credit utilization percentage. This refers to the total amount of money you’re borrowing on any line of credit.

For example, say you have a single credit card with a $5,000 limit and you’ve charged $4,500 on that card. Your total credit is $5,000 and you’re utilizing 90 percent of your available credit. If you pay it off in full by the end of the month, you’re fine.

But what if you don’t? Well, it hurts your credit score. In fact, the higher your credit utilization percentage is each month, the more it hurts your score.

Installment loans allow you to pay off some of that balance and reduce your credit utilization percentage. Yes, you may have borrowed money to do it, but since loans are a different form of debt, they can help you boost your credit score quickly.

Makes Repaying Debt Easier

According to the experts at Bonsai Finance, you can use personal installment loans to cover anything you need to. This means you’re free to use them to finance a vacation or to pay down your credit card debt. So, let’s take a look at your credit utilization again. The longer you carry a balance, the more interest you’ll pay. And in some cases, that interest can make it even harder to get out of debt.

Taking out an installment loan allows you to get rid of that balance quickly. Instead of making more than the minimum monthly payments for several years to wipe out debt, you’ll do it in a single payment. Keep in mind, you’ll still have to repay your loan on time. But since most installment loans provide lower interest rates, you’ll do it faster and with less strain on your monthly budget. Lower interest rates mean lower payments.

Boosts Your Good Payment History

Missing a payment on your credit card or any loan once isn’t a huge deal. But if you keep missing payments, especially when you can’t make the minimum payment threshold, it becomes a major problem. Those missed payments will cause your credit score to go down. And it will keep going down as long as you keep missing the payments. By taking out an installment loan, you’ll be able to use that money to pay off that debt and can start making more affordable payments each month to your loan provider.

The more consistently you do this, the better your payment history gets. Eventually, you’ll have a positive history that will give lenders confidence in your ability to repay your debts.

Only Borrow Only What You Need

With credit cards, there’ always a temptation to use more than you really should. After all, if you’re working with limited income, your credit card can help you make ends meet.

But there’s a flaw here. You’re using more than you make and that builds debt fast. And it can spiral out of control quickly.

When you take out a personal installment loan, you’re limited to the amount you borrow. And once you’re approved, you don’t have to take the full amount you’re approved for.

This makes it easier to avoid going further into debt and keeps your credit scores as high as possible.

Are Installment Loans to Rebuild Credit Right for You?

Ultimately, installment loans can help a lot of people get their credit scores back on track. But it’s up to you to decide if using installment loans to rebuild credit is right for your needs.

If you do take out a loan, remember to borrow only what you need and pay it off in full within the loan terms. And once your score is back up, do whatever you can to keep it that way.

Looking for more advice on getting out of debt and improving your credit score? Check out our recent posts for helpful hints on improving your personal finances.