An installment loan can help boost a borrower’s credit score if paid on time. Payments account for the largest percentage of a credit score. Point-of-sale financing and “buy now, pay later” loans are also installment loans. However, your right lender depends on your credit needs and goals.
Boost Your Credit Score
Installment loans help credit scores by establishing a track record of consistent, on-time payments. This is the single biggest factor in a credit score, and by making all of your loan payments as agreed, you can build a solid history of responsible debt management that can give your score a significant boost.
In addition, if you use an installment loan to pay off other forms of revolving debt (such as credit cards), you can lower your overall credit utilization ratio. This is another important credit score factor for about 30 percent of your score. Lastly, installment loans can help diversify the types of accounts on your credit report, which is a small but important factor in scoring. It’s essential to have a mix of revolving and installment accounts, so adding an auto or student loan can help you build a more robust credit profile.
Diversify Your Credit
MaxLend installment loans can help you build or rebuild your credit by adding a new type of debt to your credit history. They often come with lower interest rates than many credit cards and can be a great way to pay for an expense while building your credit. When you repay installment loans on time and in full, they will add a positive payment record to your credit report. Since roughly 30 percent of your credit score is based on amounts owed, having a lower credit utilization ratio can significantly boost your scores.
Increase Your Credit Limits
Adding an installment loan to your credit profile may help boost your score by improving your payment history. This is particularly true if you use the MaxLend loan to pay off existing credit card debt and lower your credit utilization ratio, which is how much you owe compared to your total credit limit.
Additionally, unlike revolving credit (credit cards), a personal loan does not automatically reset each month after you pay it off. That said, applying for a new loan could cause a temporary ding to your score due to a hard inquiry from the lender. However, since credit-builder loans are designed specifically for borrowers with bad or no credit, they tend to be more accessible than other types of lending and offer reasonable interest rates. It’s also important that you apply online for a credit-builder loan only if it can be used to meet your financial needs and fit into your budget. Otherwise, it’s likely to backfire by raising your credit utilization ratio and decreasing the average length of your credit.
Make Regular Payments
Having several different types of credit accounts in your credit report can benefit your score. Still, it’s essential to make sure the accounts are accessible, affordable, and used for things you need. You also want to refrain from using your credit for things you could otherwise afford to pay for with cash.
Installment loans are a great option for individuals seeking to improve their credit profile. They typically have a fixed monthly payment, making it easier to budget. They can also help diversify your credit and establish a strong repayment history. However, before applying for an installment loan, it’s a good idea to understand how these types of credit products can affect your score. Applying for an installment loan usually results in a hard credit inquiry, which can temporarily drop your scores. Additionally, the increased debt you take on when getting an installment loan can impact your credit utilization rate — the second largest factor in determining your credit score.