When used wisely, a personal loan may be able to help improve your credit score. This approach isn’t for everyone, so it’s important to understand how an unsecured loan impacts your credit.

What is a Personal Loan?

A car loan or mortgage uses a vehicle or house to guarantee that the lender can get their money back in case the debt is not repaid. A personal loan is unsecured, because it’s given based on credit score and income, with no collateral to secure it.

Your ability to qualify for a personal loan, and the interest rate offered, will depend on your credit score, debt-to-income ratio, and your overall credit history.

Because there’s more risk to the lender, unsecured personal loans have a higher interest rate than secured loans like auto loans. Credit cards, however, typically have an even higher interest rates that can range from as little as 10% to more than 20%.

How Will a Personal Loan Affect My Credit Score?

If you have other high-interest debt, a personal loan may be able to boost your credit score by allowing you to pay off the balances faster. Since the interest rate is typically lower on personal loans, you’ll also save money on interest.

Carrying a high balance on a credit card every month is considered a higher risk by lenders, and can result in a lower credit score. Consolidating debt from multiple credit cards into a personal loan can boost your score

Credit card debt is revolving, so the balances can go up and down as purchases are made and paid off. Personal loans have a fixed payment term so the balance will never go back up. This can help improve your credit score by mixing up the types of debt and preventing balances from going back up.

Things to Consider When Taking Out a Personal Loan

There are three things to keep in mind when applying for a personal loan in an attempt to boost your credit:

1. Look for a short term of 3-5 years and an interest rate that’s lower than the debt you’re paying off.

2. Make all your loan payments on time. Paying a little more than the minimum each month helps, too.

3. Once credit card balances have been paid off with the loan, be careful not to accumulate new balances on them.

Following these three steps can help you boost your credit and get on the path to better financial health.

Ready to apply? Visit our Personal Loans page to get started!