For many reasons, we often find ourselves in dilemmas that do not only make us unhappy, but also make us regret some of our past decisions. One such dilemma is having a bad credit score and struggling to improve it. Although there are several methods to improve a credit rating; many of them are not as effective as they are made to sound.
When in this disheartening situation, many people often ask if an installment loan will help or hurt their credit. In general, installment loans are one of the ways to improve your credit score, but first, there are several questions to be answered before choosing to use installment loans to improve credit score.
How Does Bad Credit Affect Me?
There is a need to understand how bad credit affects you, to find a lasting and dependable way to deal with it. Defining bad credit is entirely based on the type of credit in question as well as the lender. For many, the FICO score is the most important since it is the score most of the top credit reporting agencies, such as TransUnion and Equifax use.
There is no denying the fact that having bad credit comes with several demerits. Bad credit can make it difficult for you to buy a car or home, get affordable car insurance, get approved for a line of credit or even land a good job. Nowadays, the need for having a good credit score has become increasingly essential for normal living.
What Is an Installment Loan?
It’s important for those who are looking for a way to build their credit score fast to understand the meaning and essence of installment loans before choosing it as a method for improving their credit scores. An installment loan is a type of investment that gives people the opportunity to borrow and create a regular and fixed pattern of payments over an agreed period. Whether you have bad credit or no credit, this type of loans gives you the flexibility to make the monthly payment on time typically on the terms you request upon setting up the loan.
Based on the how installment loans work, every payment lowers your loan as well as the interest that is building on top of the loan. Not only are borrowers given options of paying off the amount borrowed through installments, but they also enjoy the privilege of working with the lender to determine the payment options. The most common types of installment payments available today are auto loans and home mortgages.
When Should I Consider Using an Installment Loan?
You should understand when you should consider using an installment loan to build credit. Here are some of the instances when obtaining an installment loan can assist with building your credit score:
• When you have not already taken out previous installment loans, or if you do not already have installment loans that have negatively impacted your credit score, using an installment loan to build your credit score may work in your favor. As a matter of fact, this is arguably the best scenario to use installment loans to improve a credit score.
• Having a paid off installment loan will positively impact your credit score and make you more attractive to lenders for future loans.
• When you are considering buying a home, typically your FICO score needs to be above 640 for a traditional mortgage. If you want an extra boost, to show your lenders that you can borrow reliably, an installment loan can be helpful. Taking on debt and paying it down over time will show the bank that they can trust you. Missing payments, or falling behind will do the opposite, so if you take on an installment loan, be careful.
• When there is outstanding open or closed no credit check installment loans that has negative marks, like late payment, delinquencies or collections write offs these can put you in a situation where lenders won't want to let you borrow, or they may charge you a high-interest rate. In this scenario, it is advisable to fix the issues that you can first, so pay off outstanding balances, report discrepancies and contact your creditors to see what you can do to improve the status of your account. After you've done this, you can consider obtaining an installment loan; however, you must keep a positive payment record, to ensure that your credit score continues to increase over time.
There are a few scenarios where getting installment will be of no help to your credit score. One of such scenarios is when there is an open installment loan on your credit record with timely payment record. In this case, getting another installment loan will be less impactful as you have already made use of the advantages of an installment loan.
How Does an Installment Loan Improve Your Credit Score?
Below are three ways through which an installment loan can be used to improve your credit scores:
Improvement of Your Payment History
Taking your FICO score into consideration, payment history typically accounts for a larger percentage of the factors that help determine the credit score for an individual. Your payment history can account for as much as 35% of the FICO score; the next biggest area of opportunity is the amount you have in debt versus the amount of credit have available or have not used. For example, if you have a $5,000 credit line and all $5,000 is unavailable, that can negatively impact your score. Where if you have a $5,000 credit line, but only $1,000 is unavailable due to purchases, and you have $4,000 in available credit, that will impact your credit positively. Other factors affecting FICO scores are the duration of credit history (15%), new credit obtained (10%) as well as the types of credit used (10%). Based on how payment history impacts your credit score, paying off your installment debt monthly will play a pivotal role in building your credit score.
Diversifying Your Credit Mix
As earlier mentioned, the different types of debt owed contribute about 10% of the information used by FICO to determine your credit score. In simple terms, the more diversified your accounts are, the better your credit score is. Therefore, if you have outstanding a personal loan, a mortgage, an auto loan, credit card debt, student loans or any other types of accounts, establishing an installment loan to settle some of these debts will bring diversification in your credit profile. And a diversified credit profile will help you improve your credit score.
Saving Money through Lower Interest Rates
With lower interest rates, higher limits, and longer payment terms, an installment loan offers you varying amounts of benefits when compared to the other options you might consider improving your credit score. Unlike credit card's that may have rates as high as 15% to 27%, or even higher sometimes, many installment loans will likely not be more than 10% and sometimes as low as 3%.
How Can I Take out an Installment Loan?
Since we have established the reasons and advantages for using installment loans to improve credit score, it is equally vital to provide a few ways to use these loans to build your credit score. Here are proven methods to use installment loans:
• Only take out a loan if you need it
No matter how focused you are on using an installment loan to build credit, do not take a loan unless you truly need it. Taking out loans when you do not need it can be more harmful to your credit score and financial situation than you can ever imagine. As a rule of thumb, only take out loans when you need them.
• Consider getting a loan from credit unions.
Most credit unions can offer lower rates on loans since they typically have a customer that has an investment in their product. Most credit unions require you to start with a minimum balance, and some ask that you do not go that amount below. Credit unions are great options for loans and all other banking services. They typically have little to no fees and are smaller, so they are typically easier to do business with.
Lastly, you should only establish an installment loan when there is a need for you to do so. Taking on a loan when you do not need it will only increase the total amount of debt owed and may reduce your credit score. Also, make sure you have a reliable payment option before taking on a loan. You can eventually improve your credit score using installment loans. However, you need to pay attention to the points listed above to truly get the best out of the installment loan.