Personal installment loans are a type of loan, so it makes sense that they could have an influence on your credit score. They do have an impact on your credit score, but it’s not always clear whether they will help or hurt your credit score. The real answer depends on a variety of factors. Some of these factors include how you use this funding and what else appears on your credit report. New installment loans can bring some much-needed breathing space and enable you to improve your credit rating. If you need a loan there are multiple places online that offer these. But if you’re not responsible you could ruin your credit score. We’re going to go into this topic in-depth.
How Can They Improve Your Credit Score?
First of all, an installment loan can improve your credit score by diversifying the number of lines of credit on your report. They also have the potential to help you retire old debt and exchange it for new debt, which would allow you to see your credit score go up because you’ve successfully paid off another loan.
Diversity of Account – Your credit score can go up because you have a more diverse borrowing portfolio. A mix of account types makes you a more reliable borrower, in the eyes of lenders. It also provides additional data for lenders to work with. The diversity of your account, which includes loans, can add up to 10% of your overall score.
Utilization Ratios – Your utilization ratio is how much of your maximum available credit you’ve used. Using personal installment loans helps to reduce that utilization ratio. To avoid damaging your credit score you should keep it below 30% at all times.
Build Up Credit –Having poor credit can be overcome. It’s not easy but it’s not hard either. If you lack credit you can try taking out a small loan. It may seem counterintuitive but having a loan on your credit report can help your overall score. Especially, if you pay on time and build a solid history. You can shop for bad credit installment loans online. But a word to the wise, don’t take out more than you can repay.
Can They Ruin Your Credit Score?
However, these loans are not always good. When used incorrectly they can damage your credit score. There are a number of ways in which installment loans can be used to hurt a person’s credit score. Although if you are responsible it can generally help your score. This section is going to show you how that tends to work.
Opening Too Many Accounts
Taking out too many installment loans can hurt your credit score because the number of accounts you have open counts for 10% of your credit score. Too much new account activity is considered a bad thing because it demonstrates a desire to borrow heavily, which is a sign of instability. The more debts you have at once the bigger your debt to income ratio. And for lenders that increases the chances of not being able to meet your obligations.
Paying Your Debts Off Early
There’s little benefit in paying off installment loans early. You don’t get any bonus points for paying off early. Furthermore, those who pay their debts off early often fail to leave a large enough financial cushion to deal with emergencies. These emergencies can lead to missed payments and even force people to take out additional loans.
How Do You Avoid Hurting Your Credit Score
Now that we know installment loans can both help and hinder credit scores, it’s time to make sure that your next loan doesn’t cause any unnecessary harm to your credit score. The easiest way to do that is to make sure you never take out too many loans at once. Make sure you pay down a significant chunk of your existing loans before taking out any new ones. That negates the initial threat to your credit score.
The second major threat is in getting too confident and paying off your debts early. There’s no benefit to your credit score in doing this and you’re leaving yourself exposed if you run into any emergencies. Without a strong liquid cushion, you’re going to find yourself vulnerable for a few months. If you must pay off your installment loans early you should go out of your way to ensure that you have a few thousand dollars in liquid assets. These assets will provide you with the support you need if you encounter a problem immediately after paying off your installment loan early.
Use Them Well
To make sure that your loans don’t cause problems you should ensure that you only take out the money if you’re sure you can make the repayments. Complete a budget and consider exactly how much you can borrow without entering into financial difficulties.