A personal loan is an unsecured loan that can be used as cash for any of your needs such as car purchases, home repair, medical expenses, etc.
When you apply for a loan you are promising that you will pay back the loan and if you don’t you run the risk of your credit score taking a big hit, that’s why it’s essential you are careful and plan to pay back your loan.
There are definitely advantages to choosing a personal loan which offers additional flexibility and more favorable rates compared to credit cards. Obtaining a personal loan will get you the funds you, but it can also contribute quite a bit toward your credit journey.
Payment History: This is an important criterion used in determining your credit score which usually is 35% of your overall FICO score making it an important factor in helping you boost your credit score.
When applying for a loan, you will be making a loan payment every month over a longer period, which will boost your credit score as long as the payment is made on time every month.
Be sure to consider if you’re late on your payment this factor will work negatively towards you, and it is suggested to make sure you have enough to pay down the loan every month.
Length of credit: Longer standing loan (length of credit history) is around 15% of your overall FICO score and is pretty big factor banks consider when looking at your credit profile.
Longer payment accounts look really good on your credit score because they show lenders that you have been maintaining your payment over the years which helps them assume that you will do the same with the loan they lend you.
When you end up getting a personal loan for a few years it will show up on your credit report and can stay on your record for up to 10 years helping you show your healthy credit journey.
Credit Mix: Credit mix is a pretty simple concept its the mixture of your credit journey so things such as credit cards, auto loans, student loans, debt, and mortgages will be 10% of your overall FICO score.
The more diverse credit mix will give your credit account a more competitive edge helping lenders see that you are financially responsible with many different loan accounts.
Credit Utilization Ratio: This is a ratio that calculates the amount of credit available to you vs the amount of credit you are using and is 30% of your overall FICO score.
The Credit Utilization Ratio is determined by adding the debtors across your cards and diving it by your credit limit giving you the result.
Lenders prefer a Credit Utilization Ratio of 30% or less is recommended to not hurt their credit score. So to the maximum, your credit score stays under the 30% mark or increases your credit limits.
Will obtaining a personal loan be the best option for you?
Taking out a personal loan is a good decision when you have a financial need. Taking out a personal loan for discretionary purchases like luxury shopping or taking expensive trips is definitely not recommended.
Personal loans are best used for things such as home improvements, car repairs, and medical bills. If a personal loan is the right choice can only be determined by you, before applying make sure you have a game plan on how you will pay back the loan.
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