Can Bad Credit Installment Loans Help Build Your Credit Rating?
LOS ANGELES – December 27, 2021 – (Newswire.com)
iQuanti: Installment loans can be a great option for borrowers with poor credit. Not only can these loans quickly get you the funds you need to cover your expenses, they can also help you improve your credit score by making payments on time and increasing your credit mix. If you need the cash and are considering an installment loan, here’s how installment loans for bad credit can help you get cash fast while helping you build your credit score.
How is the credit score calculated?
It is important to understand how your credit score is calculated before considering how an installment loan can affect it. One of the most popular credit scoring formats, FICO, lists the following 5 factors that contribute to your score:
- Payment history (35%): The factor that contributes the most to your credit score is the ability to pay off loans on time. Every late or missed payment can lower your score in this area.
- Use of credit (30%): The amount of credit you use versus the amount of available credit you have determines your overall credit usage. Creditors typically look for a score below 30%. This means that if your available credit is $ 1,000, you should have less than $ 300 used at some point. A higher ratio can make you appear riskier in the eyes of future lenders.
- Length of credit history (15%): A more established credit history may seem more favorable to lenders. And using, then repaying, credit regularly helps show your financial responsibility.
- New credit (10%): Applying for a lot of new credit can seem risky to lenders. It’s best to research the best lenders and loan options, and then strategically apply for only the credit you need and will actually use.
- Credit composition (10%): Having different types of credit on your report, such as revolving debt (credit cards) and installment loans (personal or auto loans), can show creditors your ability to manage debt responsibly.
How Installment Loans Can Help Build Credit
An installment loan has a fixed repayment term that can range from a few months to a few years, with a predictable monthly payment. This means that these loans can be easy to budget for. And committing to be a responsible borrower can improve your credit in these two key ways:
Improve your payment history by paying off the loan on schedule.
Since payment history is the biggest contributor to your credit score, making monthly payments on time can help boost your score. Keep in mind that you will need to pay off the loan on time, month after month, before you see a bump in this area. You’ll want to make sure your lender reports payments to the credit bureaus on time for this increase to happen. Setting up automatic payments through your bank can help you get the most out of it. On the other hand, late or missed payments can negatively impact your credit score.
Add a new loan type to your loan mix.
Borrowers who currently have no installment loans can improve their score in the credit mix category by adding one. Since the credit combination is only a small part of your score, you might not want to get a loan just to improve that number. But if you need an installment loan for a large purchase or an emergency expense and can commit to paying it off on time, you may also see your score increase.
The bottom line
Taking out an installment loan for bad credit can help you on your journey to improve your credit rating. Being a responsible borrower and paying off the loan on time can help boost your payment history and credit score score. And as your credit rating increases over time, you may be able to take on future debt at a better rate.
Notice: The information provided in this article is for informational purposes only. Consult your financial advisor about your financial situation.
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