With so many websites talking about effects if credit score and its importance in acquiring a loan you may tend to think that a loan is the last thing you want to protect the health of your credit report. However, everything has both dark as well as the brighter side. Look at the moon for example.
It is true that taking out a loan will affect your credit score and you must be aware of such situations to handle your debt prudently. As soon as your loan application gets an approval, your credit score will dip initially. But, it is your responsibility and diligence in making the monthly payments on a regular basis and without fail will ensure its recovery. It starts to improve right from the next month itself and continues as long as you go on making on-time payments on your debt.
Borrowing Money Can Damage Or Improve Credit Score
The positive impact
Loans may have a positive impact on your credit score as well. For this you will have to make sure that you use your loan wisely. There are some of the best ways to improve your credit score even if you take a personal loan and make the best use of it.
- Do not spend the money on your personal wants
- Try to consolidating your multiple debts
- Reduce your overall debts quickly and
- Consider improving your debt to credit ratio.
The most significant of all is to know the meaning and purpose of a loan. It is actually an amount you owe to someone else and have the legal obligation to pay it back to the lender in equal monthly payments till the time it is cleared.
However, these ‘installment loans’ are significantly different from the ‘revolving account’ loans. Usually these revolving accounts are associated with credit cards when you can take a loan from the credit card issuing company anytime. Ideally, the balance of your credit card will fluctuate depending on when you use it. The minimum amount due every month on such loans varies as well depending on the balance in your credit card and the amount used.
Improve your credit mix
You can take out different types of loans from sites such as and others that will help you to improve your ‘credit mix.’ This is the term used when you have different types of loans against your name.
The credit mix may include both revolving loan accounts as well as installment loans. However, most people are afraid of having such a mix of loan accounts which may be convenient for them to make the monthly payments but it surely has a negative impact on their credit score. Most money lender considers a credit report with such mix of loan accounts to be better than the one that has only one or a number of specific loans only. In fact, it may raise a few eyebrows.
However, in all situations making payments regular on time is paramount. If you do not, then you will be “defaulting on your debt” and that will harm your credit score. Therefore, as a rule of thumb, always take out a loan only if you find that the payment will fit in comfortably into your budget.
For debt consolidation
You may also use a loan for debt consolidation in order to improve your credit score. Debt consolidation means paying off your current debts that may be of higher interest debts with a low interest loan that you may have taken out visiting .This means now you have only one loan against your name which is much easier to repay rather than a number of high interest loans.
Paying off your high interest multiple loans will boost up your credit score, but make sure that no new charges are levied on those high interest loan accounts that you paid off. Also, make sure that you do not fall back again on your spending spree and start using your credit card all over again still having the consolidated loan to pay off. This will not serve your purpose of repairing your credit score and the whole point of consolidation will turn out to be a futile attempt.
Debt to credit ratio
You can also improve your debt to credit ratio which is the difference of your available credit and the credit limits. All three major credit bureaus Experian, Equifax, and TransUnion consider this ratio to contribute about one-third of the value of your credit.
Well, credit cards or the revolving loan accounts here are the primary concern and the closer you get to the credit limit, more negatively your credit score will be affected. On the other hand, the installment loans are not counted as significant for this ratio. Therefore, using an installment loan to pay off your credit card balances to bring the debt to credit ratio into manageable limits is another useful way to recover your credit score.
Even when the major credit rating agencies consider the installment loans in the debt to credit ratio, it will not cause a much disruptive effect to your credit score because you will already have a high revolving account balance.
Pay down your debt
Availing loans and using it sensibly will help you to pay down your existing loan accounts more easily, especially those debts that carry high rate of interest. Eve making the minimum payments on high interest accounts will not be of much helps as you will end up paying a lot more money in the form of interest charges.
Using a loan will enable you to pay these high interest balances which will negate the possibilities of those high interest charges accruing any longer on a monthly basis with your account.
Better finance management
Lastly, a loan can result in better finance management. You may have an exceptional plan to payoff your high interest debts for a specific time period but when finances get tougher it is easy to forego such plans. Installment loans cannot be stretched for decades as revolving accounts and therefore ensure better management.