Nothing can feel more devastating than living with a low credit score. But trust us— if your credit score is less than optimal there are ways to improve it. One of those is taking out an installment loan.
Wait, wait, a loan? Taking out a loan can help your credit score?
It sounds counterintuitive—crazy even—but if done right, an installment loan can actually boost your credit score. If you’re wondering how let’s break it down and find out.
What is an Installment Loan?
An installment loan is a type of loan in which you pay back what you borrow in small chunks (called “installments”). Mortgages, car loans, personal loans, student loans—these are all common examples of installment loans.
Installment loans are different than revolving lines of credit (think credit cards or HELOCs). If you’ve had a credit card, you know how this works: you borrow money, pay it back, then you can borrow more money. Your credit “regenerates” so to speak, and it will keep regenerating as long as you pay down your balance.
Not so with an installment loan. With an installment loan, you take it out once, pay it off—and that’s it. You don’t get a second one, unless you apply for it. As we’ll see below, this is one of the reason they’re so effective at improving credit scores: you can use them to replace the debt on credit card balances, which as long as you make regular payments, can drastically boost your score.
How can an Installment Loan Help Your Low Credit Score?
First, a little disclaimer—there’s no one-size-fits-all strategy to improve your history. But there are several smart tactics that, if done correctly, can strengthen your credit score over time.
Getting an installment loan and paying it off is one of those tactics, and here’s why.
1. You can improve your payment history.
Installment loans can have long-term benefits on your payment history—if you make payments on time, of course.
Remember that 30% of your credit report is composed of payment history: credit bureaus analyze your past behavior to see how well you handle debt. If you pay your installments on time, you will start to see improvements in this area.
2. You can diversify your credit.
A lot of people miss this—your credit score isn’t just determined by how well you pay debt. Credit bureaus also look at the different kinds of credit you have. They call this your “credit mix,” and, believe it or not, it forms 10% of your credit score.
Your credit mix has a surprising influence over your score. You may have ten credit cards, and you may make payments on time. But because that’s only one kind of debt (revolving credit), you could score poorly in this area.
Installment loans represent a different kind of credit, which is why adding one to a credit portfolio dominated by credit cards can have a positive impact over the long-term.
3. You can drop your credit utilization rate.
“Credit utilization score” is basically the amount of credit you’re currently using relative to how much you’re allowed to use. For example, if you can use $10,000 on your credit card and you’re at $9995, you’ll generally see a high credit utilization rate: you’re overextending your credit line.
Credit utilization rates make up a whooping 30% of your credit score, so they can be a real thorn in your side if you’re not careful.
But there’s good news—credit utilization rates are almost solely based on the balances of revolving credit lines (credit cards, HELOCs, etc), and an installment loan can help you pay off these balances. By using an installment loan to cover your debt, you open your balance up, which improves your score.
Questions to ask before you take out an installment loan.
An installment loan can be a great way to improve your credit report. But, truthfully, if you’re not financially stable to take one out, they can do more harm than good. So before you apply for an installment loan, ask yourself these five questions.
How to Get an Installment Loan with Low Credit Score
Nothing is worse than wanting to improve your credit history but having your options limited because, well, your credit isn’t good. That’s where Jora comes in. We understand credit scores aren’t exactly the way we want them, which is why, when it comes to installment loans, we look at more than credit scores in application approvals. If you want to use an installment loan to improve your credit, contact us today. We’ll look at your situation and see how we can help!
Want to know more about credit score? Here’s an Easy (Free!) Way to Boost Your Credit Score