Many people nowadays are struggling to build credit. Millennials, in particular, are having a difficult time as more than, half of millennials say that their low credit scores are holding them back as they can’t get approved for car loans, housing loans, or even a new line of credit.
Now, there is a multitude of different ways to approach this issue. Indeed, suggestions regarding how to improve your credit score are all over the internet. One strategy that has been gaining traction is taking out a personal loan. And while we’ve already talked about the many situations where personal loans prove to be advantageous, we have yet to discuss how you can use them to build credit. This is why we thought it would be useful to have a brief discussion on this subject. If you want to know more about this, read on as we talk about whether or not you should take out a personal loan to help you build up your credit score.
How Can Personal Loans Help Build Credit?
If the situation is right, a personal loan can be helpful and can positively influence your credit score. This is because taking out a loan can affect five different factors that play into your credit score.
By taking out a new loan and making all of your monthly payments on time, you are effectively increasing your credit score. This is due to the fact that institutions look at an individual’s long-term payment history to determine your credit score.
To add to this, they also consider how an individual makes use of and manages their credit. You can take advantage of the loan in this case, as long as you pay it back on time and don’t accumulate too much debt.
Can Taking Out Personal Loans Hurt Your Credit Score?
While personal loans can end up helping you when it comes to your credit score, be aware that they can also impact your credit score negatively if mishandled. All of the factors that affect your credit score positively can easily hurt you as you build credit as well.
If you end up being late on your payments, your credit score will drop. This is especially true if you default on your personal loans, which is quite worrisome as many personal loans don’t really offer the best terms as they come with high monthly payments and interest rates. This is why you should exercise a healthy amount of care when using loans to boost your credit score. Like all things, it comes with a level of risk that you should be ready to manage in the long term.
Aside from the things we mentioned above, you’ll also want to make sure that your lender is reporting your activity to the major credit institutions. If they don’t do this, your payment history and debt management capabilities won’t reflect on your credit score.
We hope this article has helped you understand how taking out a loan can help you build credit. With that being said, do note that every situation is different. Be sure to assess your current financial situation to see if taking out a personal loan will benefit you in the long run.
Here at Opelika Finance, we strive to help you with your loans with clear and straightforward repayment plans in Opelika, AL. We will make the borrowing process quicker and simpler. Get in touch with us to create your ,personal loan now!