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How Can a Personal Loan Affect Your Credit Score?

If you’re in the process of building or rebuilding your credit history, there are many ways to do it, one of which is by taking out a personal loan. This is actually a great way to build credit, but not exactly the easiest. When taking out personal loans to build credit, you need to know exactly what it entails, and you need to make sure you’re up to paying them in time so you won’t have any problems with the lender. Here’s a quick guide about how personal loans can be used to help you build your credit.


What Factors Affect Your Credit Score?


There are actually five factors that affect your credit score, namely:


  • Payment History - Getting a loan and making all of your monthly payments on time helps build a better track record of being responsible for your payments. If you’re building credit, this is one of the main factors being looked at by lenders and financial institutions.

  • Credit Usage - Having debt isn’t bad in itself, but you need to have the right kind of debt, and the right amount, or you end up being in a bad situation financially. How much and what kind of debt you have is actually a reflection of how well you manage credit. Taking out a personal loan can help you build credit as long as you pay on time, and it won’t affect your other debts.

  • Length of Credit History - Having a long credit history means you’ve been handling your finances for quite some time, and lasting that long says a lot about how responsible you are with it. If you’ve never used credit before, getting a personal loan is an excellent jumping-off point for you.

  • Credit Mix and Types - Having a limited credit history is where everyone started. That’s why you need to build credit in as many avenues as possible, like credit cards as well as personal loans and mortgages.

  • Recent Credit - Now, the fifth and final factor that can influence your credit score is recent credit. This is where applying for a personal loan can help you, as it will feed into your credit history.


Things to Remember When Using Personal Loans to Build Credit


Now that you know what factors affect credit and how personal loans play a role in it, you need to be smart with your personal loans. Here’s what you need to remember:


Avoid Late Payments - If you’re taking out a personal loan, make sure you don't pay late, as it can hurt your credit. Payments that are 30 days late or more typically show up on credit reports, so avoid it as much as you can.


Having No Credit Can Be Expensive - Having less-than-stellar credit or no credit at all can be expensive at first. This is because the loan terms aren’t exactly favorable. However, once you build good credit, you’ll get access to better terms and lower interest rates.


Conclusion


Taking out a personal loan to build your credit score is an excellent and beneficial way to get good credit. However, like any other financial instrument, you need to know the risks. If you need some guidance about loans, credit cards, and managing your finances, you better find a financial advisor or a lender you can trust.


Whenever you’re short on funds, it pays to know someone you can trust to lend a little helping hand when you need it. Stones River Credit is here to offer a variety of personal loans in Murfreesboro, TN, that fit your needs. Expect affordable payment plans and no hidden fees when taking out a loan through one of our officers. Get started and apply for a loan today!


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