Taking out and paying off debt is part of building your credit score. That said, taking out a personal loan can help you consolidate debt and add credit mix to your score, and some are even designed specifically to help you build credit. Depending on your situation, here's how using a personal loan can easily help you add to your credit score.
Pay Off High-Interest Debt
If you already have debt and are looking for a way to consolidate it, a personal loan might be the best option for you. Personal loan interest rates are typically noticeably lower than those for credit card debt. As such, if you can get a loan for the amount totaling your current credit card balance, you can pay off the same amount of debt with lower interest and build credit in the process.
Depending on what interest rates you qualify for and how large your loan might be, this might not end up being a feasible option. Further, if you do plan to consolidate your debt, consulting a financial planner to help with the process is also recommended to help you avoid falling into more debt once your loan is taken out. However, because of generally lower rates and the credit mix personal loans provide, it's worth determining whether you could benefit from debt consolidation.
Give Your Record Some Variety
Of the several factors that influence your credit score, one of them is the variety of kinds of debt you have taken on or your credit mix. This includes revolving debt, like credit cards, and also installment debt, such as personal or auto loans. If you've been building up your credit score using only credit cards, you can give your score a noticeable boost by taking out a personal loan.
Paying off a personal loan shows that you can pay off something steadily over time, as opposed to credit cards, where usage can vary from month to month. As such, adding an installment loan to your credit report can be incredibly beneficial.
Look for Credit-Building Loans
Because you might not always get the best rates and terms for personal loans depending on your existing credit, or because you may not have a need to take out a loan, credit-building loans serve as a good alternative. Rather than giving you money upfront, the amount you request is kept at the bank until it's paid off. You'll make payments as you would with a normal loan, but when you're finished, you get the amount in full plus any accrued interest.
While you're paying off this loan, reports are made to credit bureaus like with any other loan, so your credit score will get a similar boost once you're finished paying it off. Because of the purpose they serve, you may have better luck getting accepted for a loan for this than standard personal loans, and you might get better rates as well. To learn more, contact a company like Ardmore Finance.