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How a Personal Loan Can Help Your Credit Score
Understanding everything about your credit score would probably be a full time job so I'm going to break it down in a simple way for you. Hopefully you'll understand it better and try to increase it one step at a time.
A personal loan is a great way to increase your credit score. I'd say that a credit card is too if you have the will power to only spend what you can pay off at the end of the month. The good thing about a personal loan is that you get a lump sum of cash usually over about 5 years. You'll get a monthly payment up front that never changes and know that you can afford it monthly just like a car payment. Credit cards are a line of credit that you can use as you wish and sometimes get out of hand, however if you have the will power it's also a great way to increase your score.
Why Does It Increase Your Credit Score?
Pretend you're the bank for a minute and you're loaning a friend $2,000 that they want to pay back within a year. I think you have a pretty good idea in your head which friends you'd loan that money to and which ones you wouldn't right? The keyword is TRUST. The banks need to trust you to pay back the personal loan which means you needed to already have a credit card that you haven't missed payments on or defaulted on. If you do then why would they trust you to pay back the personal loan? Or car loan or mortgage loan that you might want later on.
If you have a low credit score you've obviously done something to create it so you need to fix it. You need to get a credit card or small personal loan and start building their trust again. Pay it on time and they'll begin to trust you and loan you a bit more the next time around.
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