A good credit score will help you get loans and credit cards on attractive terms. If your credit score is poor, most banks will deny you loans, and credit card unions will reject your credit card application. Do you know an installment loan can help improve credit score? To make things easy for you, here are some tips on how to use an installment loan to improve your credit score.
Diversify Debt
The credit report consists of five essential categories. The two most important ones are Payment History and Amount Owed. The “Payment History” makes for 35% of your score, while amounts owed make another 30% of the credit score. According to financial experts, you need to use the funds to make credit card payments. This will lead to entries in the payment history section that improves the credit score.
On the other hand, it will reduce the “Amount Owed.” Credit Mix is also an essential section of the credit score. It refers to different debts you owe like credit card debt, student loan, car loan, home loan. The more diverse debt you have, the better the credit rating you will have.
Save Money
When you continue to make repayments towards high-interest loans, you are losing money. Taking an installment loan and paying off high-interest debt seems like a good idea. The interest rate of installment loans falls in the range of 8% to 36%.
The interest rate of credit card debt falls in the range of 3.35% to 41.88%. This clearly shows credit debt is causing you loss. You may use the funds from installment loans to repay credit debt as it will save you money in the long run as you are not paying high-interest on the amount owed in the credit card.
Reduce Credit Utilization Rate
A high credit utilization rate hurts your credit score. Credit utilization rate refers to the amount of revolving credit you are using divided by the total credit available to you. For example, the credit limit available to you is $50,000, and your credit card dues are $25,000. It means the credit utilization ratio is 50%.
According to financial experts, you need to maintain a credit utilization ratio below 30%. This will help improve your credit score. If you have credit card dues more than $25,000, make sure you pay around $10,000 towards credit card dues to bring down the credit utilization ratio. Also, make sure you clear credit card dues each billing cycle.
Debt Consolidation
If you find it challenging to manage multiple debt payments, an installment loan to improve credit score can help. You can consolidate your debts and pay off with one installment loan. With all other debts settled, you are only required to make one monthly repayment. It will allow you to create a smart budget and make timely repayment towards the installment loan.
When you make payments on time, the payment history improves, which positively affects the credit score. Check your credit score and ensure all financial activities are reported to credit bureaus. If you find any missing information in the credit report, ask for corrections.
These are some easy to follow tips to improve credit score through an installment loan. It will help if you remain disciplined and consistent in making repayments, which may slowly improve your credit score.
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