In your quest to boost your credit score, you might have tried everything from checking your credit report for errors, paying off cards with the highest interest rates and avoiding credit inquiries to keep your score from taking a ding. While the science of credit scores can sometimes be confusing and ever-changing, applying for a personal loan and using it wisely can seriously pay off in more ways than one.
Know Whether You’re a Good Candidate for This Strategy
Something to consider is the fact that using a personal loan to improve your credit score isn’t a good strategy for everyone. Specifically, those who have maxed out credit cards or have cards with high-interest rates are often better suited for this method. If you feel you fall into either category, you’ve got to know how to make the most of your loan. This means making all your loan payments on time (or even early, if possible), paying more than the minimum amount every month and paying off your loan as quickly as you can.
When deciding on which type of personal loan is best for you, it’s a good idea to apply for those with low-interest payments and repayment terms that extend to at least three years. These two factors are essential to doing more good than harm to your credit score as well as your peace of mind. David Ramsey says, “Financial peace isn’t the acquisition of stuff, it’s learning to live on less than you make so you can give the money back and have money to invest.”
How Personal Loans Boost Your Credit Score
Besides knowing whether you’re a good candidate for using a personal loan to improve your credit score, you should also know just how your loan helps your credit score when used correctly. First of all, know that a personal loan can kick your debts to the curb faster than using your current method of simply paying off your credit card bill every month. There’s also the fact that personal loans are considered installment financing, which means they’re not doing as much harm to your score than your credit cards. Finally, having a variety of credit on your report helps your score. One word of wisdom: take steps to avoid using your credit cards while paying back your personal loan. If you find you have no choice but to pull out your card again, make sure you pay off the balance before the end of the month.
There are two types of personal loans you’ll likely have to choose from: secured and unsecured. With a secured personal loan, you’ll have to put up some kind of collateral, such as your house or car, depending on how much you’re approved for. While you might not like having to risk losing your car or house, the advantage of a secured loan is you’ll have a lower interest rate and more time to pay back the loan. As for an unsecured loan, you don’t have to put up collateral, but you might have trouble finding a lender willing to offer you an unsecured loan. That, and you’ll probably have a higher interest rate. As well-known military man George S. Patton said, “A good plan violently executed now is better than a perfect plan executed next week.” While there might be certain sacrifices involved with both types of loans, you’ve got to go with your gut.
Make Your Credit Life Easier
Do you have several different credit cards to pay off each month? If so, then you’re already well aware of how frustrating it can be keeping so many balls in the air having to remind yourself to make a payment on each card each month and remembering multiple due dates. By using a personal loan to take care of your existing debt, you only have one loan to make payments on every month, which is much easier to manage. This means less chance of you forgetting to make a payment (or multiple payments), which will result in a late charge, which results in you owing even more money. If a personal loan won’t cover the cost of all your credit card debts, focus on paying off those with the highest interest rates first. Not only does doing so take care of your current debt, it helps keep potential future debt at bay by keeping your interest payments as low as possible while you work on boosting your credit score.
Take Out Some Time to Reflect
Once you’ve successfully obtained a personal loan and have put it to good use, know that your work isn’t done just yet. It’s a good idea to reflect on the choices and habits that delivered you to debt’s door in the first place. Did you spend too much money? Or maybe most of your debt can be attributed to impulse buys. It’s also possible you have more money going out than you do coming in, which might mean looking for another job, asking for a raise or cutting back on monthly spending. In any case, true financial course correction comes from examining yourself and your financial habits to eliminate those that hurt and cultivate those that help. Sitting down with a financial advisor for more tips could be a good idea.
Also, don’t just aim for getting out of debt, aim for improving your financial situation for the better for the rest of your life and making your money work for you. Could you put some of your money to good use with investing? How’s your retirement fund looking? Work with your advisor to make a true turnaround in regards to your financial health. Remember what personal time-management guru Alan Lakein said: “Planning is bringing the future into the present so that you can do something about it now.”
If you’re tired of seeing your credit score remain relatively unchanged, change how you approach improving your credit score. Looking into a personal loan could be just the breakthrough you need. Make a plan, go over your options with a financial expert and make a commitment to remodel your financial house for the better.