Your credit score can greatly affect your financial life. Simply put, it reflects how well you handle your debt. Several lenders decide whether they can give you a loan based on your credit score. There is a good chance to improve your FICO score by taking a personal installment loan.
Unlike short-term payday loans which is debited on your upcoming pay day, an installment loan is already divided into simple, manageable payments over a course of several months and it is a lot easier for the borrower to keep up with the payments.
Here are 3 ways an installment loan can help improve your credit score:
When your credit score is being created by FICO, it is compiled of 5 different categories e.g. Payment History and Amount Owed can make up to 70% of your score.
While these 2 categories are very important, we will focus on Credit Mix which makes up to 10% of your score. This category takes into account the different types of debt you owe for example: Credit card, personal loans, student loan, auto loan, mortgage, etc. The more diverse your debt is, the better your score becomes.
An installment loan can help you to pay some of your credit card debt (if you have it) and this, in turn, would also help diversify your credit mix.
The lower your debt, the higher chance you have to raise your credit score. Sounds obvious, but how do you lower your debt?
Search for lenders that offer you the lowest APR (Annual Percentage Rate) and use them to consolidate loans with higher APR.
Consolidating high-interest debt such as payday loans into an affordable installment loan with a lower APR is a great way to save money. Additionally, lenders may offer returning clients better APR via different types of Loyalty Programs.
Click Here to read more about CreditCube’s Loyalty Program.
As mentioned before, payment history is a big part of your overall score. Making your installment loan payments on time can improve your score a lot. However, if you know in advance that your payment may not go through, it is a good idea to contact the lender to inform them. Lenders will be glad to offer you alternatives that will keep you in good standing and avoid missing payments.
It’s important to know that not all lenders report your behavior to the credit bureaus and this is something that you can check with your lender.