Loans Explained: How Personal Loans Affect Your Credit
(USNewsBreak.com) – Your credit score is a significant number. You want to get it as high as possible and keep it there, but can be easy to make missteps that cause your score to decline rapidly. Any loan or credit extension can hurt or help your score, and a personal loan is no exception. The key is to know how to use it properly to get benefits without penalties.
Personal Loans Explained
A personal loan is a way to borrow money from a lender. It differs from a mortgage or auto loan because you don’t need collateral. Because the loan isn’t intended for a specific purchase, you can spend the money on anything you want.
Many people will use the funds to consolidate other debts. For example, if you have a couple of credit cards with balances, you can use the money to pay off both of those debts. You might also use the loan to make a large purchase or pay an unexpected expense.
Personal loans offer a great opportunity if you’re building credit or rebuilding it. Some lenders focus on offering them for people with lower credit scores.
Advantages
Personal loans typically will have decent interest rates. They are far lower than what you get with a credit card, making this a cost-effective way to get extra money when you need it.
This type of loan boosts your credit score when you pay it on time as agreed. It also adds some variety to your credit report. Different types of credit such as revolving debt, mortgage accounts, and more can provide an excellent boost to your score, as long as you stay up to date on payments.
A personal loan also does not become part of your credit utilization ratio, which equals the revolving credit you’re using divided by how much you have. However, using your loan to pay off a credit card, which does factor into the ratio, can give your score a nice increase.
Disadvantages
While a personal loan can have a positive impact on your credit score, it also comes with a few potential disadvantages. Anytime you borrow money, there is the potential for it to hurt your credit score. For example, the initial process of securing the funds will cause a dip in your score because the lender will need to do a hard credit check. Needing a hard inquiry every once in a while shouldn’t damage your credit score too much, but it’s an important factor to keep in mind if you’re looking to get a loan.
Borrowing too much or making an agreement you cannot afford can also lead to trouble with falling behind on your obligation. Just as paying on time each month will build your score, missing payments harm it. Making sure that you aren’t building up too much debt is a crucial part of keeping your score where you want it.
If you know you can afford to make the payments on a personal loan each month, then it’s a valid option when you need money. You might experience a good increase in your credit score by having this type of funding.
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