Do Installment Loans Help Build Credit?
Having a strong credit history is extremely important. While your credit score is reviewed when applying for a new credit card or bank loan, it’s actually used in many other situations as well. If you are looking to buy a house, mortgage lenders will look at your credit history to ensure it isn’t too risky to approve you for a mortgage. They will also use your credit score to determine your interest rates. Credit scores can affect whether you qualify for an auto loan to buy a car, employers can check credit reports to confirm that potential employees are financially responsible, and utility providers could opt to deny you service if they think your credit isn’t good enough.
How Can You Improve Your Credit Score?
While some solutions are more difficult than others, pursuing an installment loan to help consolidate your debt is a fantastic first step. An installment loan allows you to pay off all your debt under one umbrella. This will immediately improve your payment history and debt ratio. You can pay back an installment loan in regular, fixed monthly payments that are much more budget-friendly than splitting your debt amongst a variety of different sources of credit.
In addition to installment loans, there are other to help improve poor credit. Some of these things may take a little longer to have an effect, but are still worth doing in the long run. Checking your accounts for outstanding payments and taking care of them is a good start. You can also make a commitment to limiting your credit usage. It’s true that opening too many accounts at once will have a negative impact on your score, but if you currently only have one account, you might want to open an additional one to start building a more diverse credit history.
Understand What Contributes to Your Credit Score
There are many things that can either help or harm your credit score. Sometimes, it can seem like there is a secret algorithm actively working against you. But there are actually five main variables that impact your credit score. Understanding them can help you make good credit decisions in the future:
Consistent Payment History
One of the most important components factoring into your credit score is how consistently you make your payments. Missing a payment indicates that you might be unreliable and this makes it difficult for lenders to believe that you will repay your debt. Slipping on a payment once or twice is understandable, but a long history of missed payments can have a very negative impact on your credit score. Payment history accounts for 35% of your score and plays a huge factor in determining whether or not you are eligible for big purchases, loans, etc.
The amount of debt you owe in comparison to your credit limit is another important factor. In fact, it accounts for 30% of your score. The lower your debt ratio, the better your score. A low debt ratio shows that you’re not consistently borrowing significantly beyond your means.
Credit History Length
There are a few different ways to determine the length of your credit history. In general, a longer history is considered more trustworthy. Lenders can determine this by looking at when you opened your first account or calculating the average age of all the accounts you own. This accounts for 15% of your score.
Even if you’ve had your account for decades, making every payment on time and using small amounts of your credit limit, it’s still possible for your score to be lower than you’d like simply because you only have one account. Ideal candidates are those who have a diverse selection of credit accounts. This doesn’t just mean credit cards; your portfolio could also consist of car loans, student loans, mortgages, and more. Your credit diversity accounts for 10% of your score.
New Accounts and Inquiries
While having multiple accounts is good for your credit history, opening a large number of accounts all at once can cause lenders to be suspicious. Having multiple hard inquiries on your credit can be harmful as well. These usually show up when you’re applying for a new line of credit, so doing this often can indicate that you may be trying to borrow large quantities of money in a short amount of time. This accounts for 10% of your score.
Getting an installment loan to consolidate your debt and understanding the ways that you can nurture a positive credit score may seem overwhelming, but is easier than you think. Reach out to Western Shamrock today to learn more about your options to consolidate your debt and answer any questions that you might have.