If you have experienced applying for a loan, you are most likely familiar with what a credit score is. This mark, which ranges from 300 to 850, is essentially a reflection of your credibility and integrity as a borrower; the higher your credit score, the higher your creditworthiness.
Having a high credit score can benefit you in several ways. For one, you can readily secure a loan since one of the most significant factors in loan approval is the credit score. You may not even have to seek lenders out, as they will voluntarily reach out to you to encourage you to get a loan from them. You can also get lower interest rates, better loan terms, and a lower initial deposit on your utilities and apartment rental if you possess a solid credit score.
Given the importance of obtaining and maintaining a high credit mark, you should always find ways to build your credit rating. While the connection is not apparent, did you know that you can use an installment loan to improve credit score?
What Is an Installment Loan?
As the term suggests, an installment loan is a type of loan wherein the borrower pays the lender a portion of the debt in regular periods or installments, usually every month or twice a month. Some examples of installment-type loans that you are most likely to be familiar with are home mortgages, car loans, or personal loans. While there are several financing options available, the majority of borrowers opt for installment loans because they have fixed interest rates and lower monthly payments because of the longer terms.
How Can Installment Loans Improve Your Credit Score?
If you have an installment loan, the lending institution will report your payment history to credit reporting bureaus. This report can impact your credit score. Here are some of the ways you can utilize your installment loan to improve your credit score:
Gives You the Chance to Make Regular and Timely Payments
Installment loans are steadily growing in popularity because they are generally fixed, in terms of payment amount and schedule. As a borrower, you know exactly how much you need to pay every month, which makes it easier for you to plan, save, and make payments.
Make sure that your installment debt will work to your advantage by focusing on making timely and regular payments instead of concentrating on how you can pay the entire loan balance. When you diligently pay your dues on time, you are essentially pushing your credit score higher.
Note that credit bureaus use several factors to calculate your credit score, and on top of the list is payment history, which demonstrates your reliability in meeting your financial obligations on time. Payment history accounts for 35% of your total credit score, the highest percentage weight among the five main factors that impact the score.
Can Diversify Your Loan Portfolio
Apart from payment history, another factor that significantly affects your credit score is the type of credit with a percentage weight of 10%. When you secure an installment loan, you are diversifying your loan portfolio. As you successfully make payments on all your existing loans, you are showing the credit reporting agencies that you can be trusted in paying your financial obligations.
Your credit score is undeniably critical in building and maintaining a good reputation as a borrower. A good score will help your business prosper. Make sure to understand the implications of every financial decision you make, such as securing installment loans, so that you will know how to make use of them towards your favor.
