• About
  • Mortgage Basics
  • $40K Challenge
  • Aunt Doris
  • Grandfather Says
  • Privacy
  • Archives

Len Penzo dot Com

The offbeat personal finance blog for responsible people.

How Personal Loans Can Boost Your Credit Score

By Sabado Domingo

debt and marriageIf you want to improve your credit score, you might mistakenly believe that the best thing to do is to completely avoid getting into debt. However, not having any debt can actually have the opposite effect when it comes to your credit rating.

If you don’t have any credit, and no history of paying any loans back, potential creditors have no idea what you might be like as a borrower — and may be reluctant to lend money to you as a result. On the other hand, borrowing via a personal loan can actually help you improve your credit score — as long as you borrow responsibly.

Show Lenders You’re Eligible

Your credit file doesn’t just show the loans and credit cards that you have; it also lets potential lenders know if you have been recently rejected after applying for credit. If you’ve been accepted for a personal loan, this lets other lenders know that you are eligible to borrow money and that other lenders don’t have a problem letting you borrow, which will always work in your favor.

Improve Your Score With Repayments

When you take out a personal loan, it’s important to calculate how much you’re going to be able to comfortably borrow. Being late with or missing a repayment can leave your credit score plummeting. On the other hand, responsibly making regular repayments on time each month will improve your credit score drastically.

Improve Your Borrowing Potential

When you take out a personal loan and pay it back responsibly and on time, your credit score will subsequently improve. Even better, once you’ve repaid your personal loan, other lenders will see that you’re a responsible borrower who can be trusted, making it easier to borrow larger amounts of money in the future. It will also make it easier to borrow money for large purchases, like a new home.

Consolidate Your Debts

If you already have existing debt and are worried about a drop in your credit score, another way that a personal loan can help you improve your rating is by providing you with funds to consolidate your existing debt. Several debts on your credit score can have a negative impact, so the fewer lines of credit you have open at any one time, the better. You can use a personal loan to consolidate all your debts, leaving you with one, easily-manageable loan to repay instead of several. Repaying your existing debts will improve your credit score — and by continuing to make timely repayments on your consolidated loan, you can improve it even further.

How to Choose the Right Personal Loan for You

When shopping for a lender, it’s important that you look for a personal loan that you’re not only likely to qualify for, but also are able to afford. Consider:

Eligibility Checkers. It’s a wise idea to use an eligibility checker tool to help you determine which personal loans you are going to be in with the best chance of being accepted. These tools will perform a soft search that does not affect your credit score, to let you know which loans you have the best chance with.

An Affordability Check. Before you go ahead and apply for a personal loan, it’s important to take some time to draw up a budget and determine your income and outgo, to figure out exactly how much you will be able to afford to put towards repaying a loan. Missing payments, making payments late, or being unable to make the minimum payment in full can all have a very detrimental effect on your credit score.

Your Existing Debts. It is also worth considering any existing debts that you have before you apply for a personal loan. Be sure to include the repayments for these debts when you conduct an affordability check and make sure that you will still be able to continue comfortably repaying them even with the extra credit – unless you are using the personal loan to consolidate them.

Borrowing Only What You Need. It can be tempting to borrow more money than you need if you are able to, however, bear in mind that this will lead to higher repayments and interest rates. That’s why it’s advised to only borrow the amount of money that you need and don’t be tempted to take any higher offers.

The Bottom Line

When you borrow money and make repayments responsibly, a personal loan can have a very positive impact on your credit score. The key is to make sure you borrow responsibly.

Photo Credit: stock photo

July 14, 2020

The Question of the Week:

Are cryptocurrencies a legitimate wealth preservation asset?

View Results

Loading ... Loading ...

Recent Posts

  • Black Coffee: Digital Castles in the Air
  • How to Improve Your Sports Betting Success
  • Toyota Has Started Accepting Bitcoin for Payment
  • 100 Words On: Why You Need Emergency Savings AND a Rainy Day Fund
  • Why You Should Consider a 203k Mortgage When Buying a Fixer-Upper
  • 6 Ways to Avoid Becoming a Pickpocket Victim
  • What Beginners Should Think of Before Starting Forex Trading
  • The Embarrassing Anatomy of a Phishing Scam
  • Black Coffee: Too Little Too Late
  • Dealing With a Deceased Person’s Money and Property

Disclaimer

This site is for informational and entertainment purposes only, and the content herein should not be mistaken for professional financial advice. In fact, making investment decisions based on information published here, or any other website for that matter, is more than unwise; it is folly. This website accepts advertising in the form of monetary and other compensation; as such, topics of discussion are occasionally influenced by these advertisers. Sometimes, an article may also include affiliate links, meaning, at no additional cost to you, this blog earns a commission if you click through and make a purchase (for example, as an Amazon Associate I earn from qualifying purchases). Remember, you and you alone are responsible for the decisions you make in life, so please contact an independent financial professional for advice regarding your unique personal situation.

Sign up for the weekly Len Penzo dot Com newsletter
Len Penzo dot Com Delivered Weekly
Join more than 40,000 readers and fans who enjoy personal finance and macroeconomics with an offbeat twist!
Invalid email address
Thanks for subscribing!

Popular Now:

  1. 1. The 6 Most Valuable Grocery Store Products
  2. 2. Series I Savings Bonds Are Now Paying 9.62%; Here Are Their Pros & Cons
  3. 3. 25 Examples of Shrinkflation That No Longer Fool Consumers
  4. 4. 7 Big Reasons Why a Roth IRA Isn’t the Best Way to Save for Retirement
  5. 5. 3 Ways That Great Sleep Helps You Get Richer
  6. 6. What’s the Fastest Way to Pay Down Your Mortgage Early?
  7. 7. How to Save Money on Dental Care So You Won’t Go Broke at the Dentist
  8. 8. Historical Gold & Silver Benchmarks for Wages and Commodity Prices
  9. 9. Tip Inflation: We’ve Got Nobody to Blame But Ourselves
  10. 10. 4 Good Reasons Why Some Quarters Are Painted Red

All-Time Most Popular:

  1. 1. 19 Things Your Suburban Millionaire Neighbor Won’t Tell You
  2. 2. Dear Friend: Here Are 41 Reasons Why I’m NOT Lending You the Money
  3. 3. Why Your Expensive Luxury Car Doesn’t Impress Smart People
  4. 4. If You Can’t Live on $40,000 Annually It’s Your Own Fault
  5. 5. 21 Reasons Why Corner Lots Are for Suckers
  6. 6. 4 Smart Reasons Why College Isn’t for Everyone
  7. 7. 18 Fast Facts About Social Security Numbers
  8. 8. My Ketchup Taste Test: Upset! Guess Which Brand Topped Heinz
  9. 9. Why I Prefer a Spreadsheet to Track Expenses and Manage My Finances
  10. 10. Here’s a Simple Trick for Getting Credit Card Interest Charges Waived

Copyright © 2022 Len Penzo dot Com · All Rights Reserved · Designed by Nuts and Bolts Media

© Len Penzo dot Com 2008–2022