NEW YORK – May 31, 2022 – (Newswire.com)
iQuanti: Like any loan, an installment loan is absolutely going to impact your credit, and it can be used as a tool to build credit. Compared to other loans, installment loans are usually fixed and can be considered a manageable way to build credit since its payments never change, you know when you’ll make those payments, and you know how long you’ll be paying back. a loan.
How to build credit with installment loans
Make all your monthly payments on time
Your credit score, a three-digit number based on information in your credit report, helps lenders determine how likely you are to repay a loan.
The most important element of your credit score is your payment history. Regularly making all your monthly payments on time to a lender who reports your activity to a credit bureau will improve your credit score. On the other hand, payments that are missed or overdue by more than 30 days will have a negative impact on your credit.
You have a diverse mix of credit types
When a potential lender checks your credit report, there is a list of all credit accounts that have ever existed in your name. Scores tend to be higher for consumers who have a combination of revolving credit, such as credit cards, and installment credit, such as mortgages, car loans, student loans.
You have a good credit utilization rate
Your credit score is heavily influenced by your credit utilization (the amount of revolving credit you have compared to your credit limit). A good rule of thumb is to keep your credit utilization rate below 30%. To calculate your utilization rate, first add up all your credit limits, then divide your outstanding balance by the sum of your credit limits.
Taking out an installment loan to refinance and/or consolidate credit card debt can immediately reduce your credit utilization rate.
Should you get an installment loan just to build credit?
It’s generally not advisable to take out an installment loan just to improve credit, especially if you risk taking on monthly payments you can’t keep up with. But getting an installment loan with monthly payments you can manage for a big purchase like a car or house, or to pay off credit card debt, can be an effective way to improve your credit score.
The bottom line
Installment loans can impact your credit score in the same way as any other type of loan. The difference is that some people find installment loans easier to manage due to their fixed payment structures. Always be sure to pay your bills on time and don’t hesitate to talk to a financial planner about the best way to improve your credit score given your situation.
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Do Installment Loans Impact Your Credit?