So you’re trying to establish or rebuild your credit. There are many ways to do that, but one that you might not have considered is getting an installment loan.
Here are ways that you can rebuild your credit with an installment loan.
1. Make Sure The Lender Reports To All Three Credit Bureaus
If a loan company does not report to any of the three national credit bureaus (Experian, Equifax, and TransUnion), your loan will do nothing for your credit report.
That’s why payday loans do not help your credit — they don’t report to any credit bureaus.
2. Decrease Your Credit Usage By Consolidating Your Debt
One way to give your credit a bump is to use an installment loan to pay off credit card debt.
Here’s why the trick works:
A key factor in determining your credit score is your credit utilization rate.
Your credit utilization rate is the percentage of credit you use from the amount of credit available to you
In other words, let’s say when you add up all of your credit cards and other credit accounts, the total amount of credit you have at your disposal is $5,000.
If you have maxed out several credit cards and are using $4,000 of the $5,000, your credit utilization score is 80%. The higher your credit usage, the lower your credit.
Paying off a credit card with a loan decreases your credit utilization score by increasing the amount of credit you have and reducing the amount you are using.
So back to our example above…
Suppose you have $5,000 worth of accessible credit and you are using $4,000. Now let’s say you get a $1,000 installment loan and use it to pay off $1,000 on one of your credit cards.
By doing this, you increase your available credit to $6,000, which effectively decreases your credit usage. You still have $4,000 in debt, but now with $6,000 in accessible credit, your credit usage drops to 60% instead of 80%.
By using less credit, you’ll see a bump in your credit score fairly quickly.
3. Make Payments On Time Each Month
This may go without saying, but if you start missing payments or are consistently late, your credit will take a hit.
Setting up automatic payments is a great way to ensure your payments are made on time every month.
If you’re not comfortable with auto payments, you can set a reminder on your phone to make your payment at the same time each month.
4. Diversify Your Credit Accounts With An Installment Loan
Chances are, you probably have a car payment, a few credit cards, and maybe even a mortgage. Each of these types of accounts represents a good credit mix.
If all you have are credit cards, your credit score could drop due to a lack of diversification.
Typically, having multiple types of credit accounts open demonstrates healthy credit practices, and you will be rewarded for it.
If you’ve never had an installment loan, you may see your credit score rise when you get one simply because it diversifies the types of credit accounts you have.
5. Give It Time
The most important thing is to stay consistent. Rebuilding credit takes time. So don’t get discouraged.
Make good financial decisions and work hard to utilize as little of your available credit as possible.
Want to apply for an installment loan? You can start an application online right here.