How an Installment Loan Can Help Build Credit

A personal installment loan can be a powerful tool to boost your credit score. By borrowing a fixed amount of money and repaying it in regular, manageable installments, you demonstrate financial responsibility and a consistent payment history — key factors in building and improving your credit. With timely payments and responsible borrowing, a personal installment loan can be a significant step toward achieving a healthier credit profile.

Let’s dive deeper into the topic and find out what the credit score is based on, how to start building your credit history, and how to improve your score once you have one.

Key Takeaways

• A credit score is important for many areas of life outside of just finances. For example, a good credit score can improve your chances of getting an apartment.
• To create a credit history when you don't have one, you should try to take out a credit builder loan, become an authorized user of someone's credit card, or get a cosigner.
• If you need to boost your credit score, you should always pay your bills on time and limit new card requests.

What Is a Credit Score?

Also known as the ‘FICO score,’ your credit score can be anywhere between 300 and 850.

The main competitor of the FICO score is the VantageScore. The latter uses the same range and the same data but weighs the information a bit differently. That means that your FICO and VantageScore can be slightly different, but if one of the scores is great, the chances are extremely high that the other will be high as well.

The three credit bureaus that collect credit information are Equifax, Transunion, and Experian. The bureaus then sell the information to the creditors. Your credit score across all three bureaus might vary a bit, but, in general, it is the same.

Creditors can set their own standards for what credit scores they are willing to accept. Here are the general guidelines that you can consult:

• Scores of 629 and below – poor credit
• Between 630 and 689 – fair credit
• 690 – 719 – good credit
• 720 and higher - excellent credit

What Is the Credit Score Based on?

A FICO score considers five different categories from the credit reports (the percentages show the factor's influence on your overall score).

• 35% - your payment history. Whether or not you have paid past credit amounts on time.

• 30% - amounts owed. Having multiple credit accounts is not necessarily a bad thing. But if you use too much of your available credit, the banks might consider you a high risk.

• 15% - credit history length. The age of your oldest and newest account and the average of all your accounts are considered, as well as how long it has been since you have used some specific accounts.

• 10% - new credit accounts. If you have opened several new accounts in a short period, you might present a greater risk for the lenders.

• 10% - the credit mix. Even though you don't need to have one of each, the score looks at how you use credit cards, mortgage loans, accounts with retail and finance companies, and installment loans.

VantageScore uses similar factors but ranks them by influence.

• Payment history (extremely influential)
• Credit utilization (highly influential)
• Length of credit history and credit mix (highly influential)
• Amounts owed (moderately influential)
• Recent credit behavior (less influential)
• Available credit (less influential)

The Benefits of Having a High Credit Score

Having a good credit score benefits you in many ways.

You will have low interest rates (the amount a lender charges a borrower) on loans and credit cards and a better chance of loan and credit card approval. You can even try applying for higher limits. A high credit score means better car insurance rates and fewer problems renting apartments and houses.

Moreover, you’ll be able to avoid dealing with any deposit. For example, when getting a phone on contract.

Finally, a high credit score gives you more bargaining power, as you will be able to negotiate a lower interest rate on a loan, for example, and use any attractive offers from other companies as leverage.

Oh, and you can use your high credit score to brag, which is also a plus.

7 Proven Strategies To Build Your Credit History

By implementing these detailed strategies, you can effectively build a strong credit history, paving the way for a better financial future.

1. Become an Authorized User

If you have a family member or a close friend with a credit-worthy account, you can ask them to let you become an authorized user of their card.

As a result, you will get a new credit card with your name that will be linked to your friend’s account. Bear in mind that in such a case, you both will be able to impact the credit scores of each other if one of you decides not to pay the credit on time, for example.

Many major credit card companies report authorized user transactions to credit bureaus. So, it’s a quick way to start your credit journey.

On some online platforms, you can become an authorized user of a stranger's credit card. The strategy is called "piggybacking for credit."

2. Take Out a Credit-Builder Loan

Credit-builder loans are specifically designed to help individuals build credit. Unlike traditional loans, the borrowed amount is held in a bank account while you make fixed monthly payments. These payments are reported to the credit bureaus, helping you build a positive credit history.

Once you’ve paid off the loan, the funds are released to you. This type of loan not only helps you build credit but also encourages saving habits. Some credit unions and online lenders offer credit-builder loans, making them accessible even if you have no credit history.

3. Pay All Bills on Time

While credit card and loan payments are the most commonly reported to credit bureaus, other bills like rent, utilities, and phone bills can also impact your credit. Some services, like Experian Boost, allow you to report on-time payments for these bills to the credit bureaus.

Consistently paying all your bills on time demonstrates financial responsibility and can positively influence your credit score. Set up automatic payments or reminders to ensure you never miss a due date, and keep track of all your payment obligations.

4. Use a Co-Signer for Loans or Credit Cards

If you have trouble qualifying for a loan or credit card on your own, using a co-signer can be a beneficial strategy. A co-signer is someone with good credit who agrees to take responsibility for the debt if you default.

Having a co-signer can help you get approved for credit and start building your credit history. It’s crucial to make all payments on time, as any missed payments will affect both your credit score and the co-signer’s. This approach can help you establish credit, but it also requires a high level of trust and responsibility.

5. Monitor Your Credit Report

Regularly checking your credit report is essential for building and maintaining good credit. You’re entitled to one free credit report per year from each of the three major credit bureaus (Equifax, Experian, and TransUnion) through AnnualCreditReport.com.

Reviewing your credit report helps you spot any errors or fraudulent activity that could negatively impact your credit score. If you find any inaccuracies, dispute them with the credit bureau to have them corrected. Monitoring your report also allows you to track your progress and stay informed about the factors affecting your credit score.

By implementing these detailed strategies, you can effectively build a strong credit history, paving the way for a better financial future.

6. Apply for a Secured Credit Card

One of the easiest strategies is to find a bank that offers a secured credit card. You would be asked to put a certain amount in a bank account, and then the bank will allow you to borrow the same amount you already have in the account.

To open an account, you'll be required to put down a refundable security deposit, which typically serves as your credit limit. For instance, if you deposit $200, your credit limit will be $200. This deposit acts as collateral for the lender, reducing their risk and making it easier for you to get approved.

Using your secured credit card responsibly is key to improving your credit score. Make small purchases that you can easily pay off, and ensure you pay your balance in full each month. This demonstrates to the credit bureaus that you can manage credit responsibly. Over time, these positive payment habits will be reflected in your credit report, helping to boost your score.

Many secured credit cards come with additional benefits. Some issuers may offer the opportunity to upgrade to an unsecured card after a period of responsible use, returning your deposit and increasing your credit limit. Additionally, some secured cards may offer rewards or cash back on purchases, providing extra incentives to use the card wisely.

7. Apply for a Student Credit Card

You might be able to get a student credit card. However, it will be much easier for students who are over 21 and have an official source of income.

A lot of credit cards for students require a social security number. They can be offered only to those who are at a four-year university, community college, or other higher education institution.

Other Ways To Build a Credit Score Fast

Here are a few other ways to help you build a credit history that doesn’t require a credit card.

Pay Rent Through Credit Reporting Services

Many rent reporting services allow you to report your monthly rent payments to credit bureaus. Enrolling in such a service ensures that your on-time rent payments contribute to your credit history. This can be a simple yet effective way to build credit without taking on additional debt.

Take Out a Phone Contract

Securing a phone contract can be challenging, especially if you have no credit history or a low credit score, as many phone companies require a large security deposit. However, all monthly payments made under the contract contribute to your credit history, demonstrating your ability to manage regular payments.

Lease a Car

Leasing a car is another way to build your credit history. By making consistent, on-time lease payments, you can positively impact your credit score. Auto leases are reported to credit bureaus, reflecting your payment habits and financial responsibility.

Ways an Online Personal Installment Loan Can Help Build Credit

Did you know that an installment loan can help you improve your credit score?

Of course, taking out a loan alone, for that matter, is not the best decision. But if you are looking for an emergency financial solution, then an installment loan might become not only that but also a great way to build credit.

Here is how a safe and affordable installment loan can help you:

• Diversify your credit mix. Remember one of the five categories FICO considers when developing your credit score? A credit mix refers to the various kinds of debt that you owe. If, for example, you already have a mortgage and credit card debt, then an installment loan can diversify your credit mix even more. The more diverse this category, the higher your overall score.

Tip: You might take a loan to pay off some of your credit card debt, but make sure this is done strategically to not increase your total debt load.

• Pay off debt faster. If you find an affordable installment loan with low interest rates, you can use it to pay off your other debts with higher interest rates. This step would require careful calculation and investigation. Find out how much you owe (together with the interest rates) and start looking for an installment loan with an equal or lower rate. The fact that you have managed to pay off your other debts will be reflected in your credit score.

• Improve your payment history. Whether you’re looking for a way to improve or begin your payment history, getting an installment loan might be a great place to start. Ensure that all the monthly payments are made on time and take advantage of the improvement in your credit score.

Important: Make sure to ensure that the lender reports all the information to the credit bureaus. Otherwise, all your efforts would go for nothing.

How to Choose the Right Installment Loan for Rebuilding Credit?

How do you choose the best installment loan out there? If you want to start building or improving your credit score, then you have to, ideally, go for a loan that will not simply end up on your credit report.

The installment loan should also be:

• Readily accessible. Whether you have a non-existent or bad credit score, you should try to find an installment loan that you can take out with your current score.

• Affordable. You have to go for an affordable online installment loan. Otherwise, you might end up only ruining your credit score. Find an option with a great interest rate, affordable monthly payments, and a low origination fee.

• Productive. You don’t want to take out a loan just for the sake of it, you also want it to be useful. An auto loan, for example, can be used to build your credit score and get a new vehicle.

In a nutshell, don’t sacrifice your budget to build credit. Choose a smarter path and go for installment loans that tick all the boxes.

5 Ways To Improve an Existing Credit Score

Improving your credit score can open doors to better financial opportunities, from securing lower interest rates on loans to getting approved for premium credit cards. Whether your credit score needs a boost or you're aiming to reach an excellent rating, there are practical steps you can take to enhance it. Here are five effective strategies to help you improve your existing credit score and achieve greater financial stability.

1. Avoid Late Payments at All Costs

Everybody knows that you should always pay your bills on time. But it’s easier said than done.

Here are a few tips that will help you be at the top of your game:

• Automate bill payments from your bank account. In such a way, the right sum will always be transferred to the bank on time.
• Set due-date alerts on your phone.
• Create a digital filing system to keep track of all monthly bills. This will help you spread out your budget more efficiently.

Remember that payment history has one of the biggest impacts on your credit score, so you should do your best to manage your bill payments.

2. Aim for 30% Credit Utilization (or Less)

Credit utilization is the portion of your credit limit that you are using at the moment. The best way to ensure your credit utilization is okay is by paying your credit card balances in full each month.

If you can’t do that, try to keep the total outstanding balance at 30% or less. Getting your credit utilization to 10% will benefit your credit score even more.

Tip: You can also ask for a credit limit increase (make sure your balance doesn’t increase too).

3. Limit Your Request for New Credit

There are two types of inquiries into your credit history.

• The so-called soft inquiries include checks performed by potential employers, credit card companies, and you. Such inquiries do not affect your score.
• On the other hand, hard inquiries can affect your credit score (sometimes for two whole years!). These include applications for a new credit card, an auto loan, a mortgage, etc. 

An occasional inquiry won’t have an effect. However, multiple hard inquiries can easily damage your score, so try to avoid applying for new credit too often. Otherwise, it might look like you desperately need money due to financial difficulties (therefore, you are a high risk for the banks).

4. Keep Old Accounts Open

In a nutshell, the older your average credit age, the higher your credit score.

Do you have old accounts that you are not using? Don’t close them out. You are going to lower your available credit and increase the credit utilization ratio.

5. Consider Taking an Installment Loan

You have to try to pay your bill in full whenever it is possible. In some cases, an installment loan can help you with that.

If you have a few outstanding debts, it may be beneficial for you (and your credit score) to take out a loan and pay them all off. If you manage to do that, you are going to have only one payment to deal with.

Boosting your credit score is not an overnight process, but with consistent effort and strategic financial management, significant improvements can be made. By avoiding late payments, managing your credit utilization, being strategic with new credit applications, keeping old accounts open, and considering installment loans, you can steadily enhance your credit profile. These steps not only pave the way for better financial opportunities but also contribute to a more secure and stable financial future. Remember, responsible borrowing and timely payments are key to achieving and maintaining a high credit score.