Using long-term loans like personal loans or other credit can help fix your credit score through three of your biggest credit score factors
When you think of long-term loans, you’re usually planning a big purchase like a house or a car but you might not know that you can also use smaller loans to help improve your credit score. Borrowing as little as $1,000 can help pay off high interest debt and work on some of the most important credit score factors.
This doesn’t mean you should rush to take out a long-term loan or any type of debt you don’t need but learning how to use credit can open up a lot of doors to lower interest rates and funding for your big projects.
How Your Credit Score Works
To see how long-term loans help build your credit, first you need to understand a little about how your credit score works and what affects it. The three credit bureaus collect all the information from people that lend you credit and where you apply for credit to put in your credit report. Other companies then use one of these three credit reports to calculate a FICO score based on five factors.
The biggest factors in your credit score, making up 65% of your score, are your payment history and how much total debt you have right now. These are followed by the length of your credit history (15%), new credit you’ve taken out (10%) and the types of credit you have on your report (10%).
You can’t really do much about how long you’ve had credit, it’s just something that builds over time. You also can’t do much about your payment history immediately but this is really where long-term loans help build your credit score.
Making those monthly payments on a long-term loan; whether on a mortgage, car loan or a personal loan is going to show creditors that you can budget your money and meet monthly obligations.
Long-term loans also work on some of the other credit score factors and can start working immediately to boost your credit score. Taking out a personal loan gets recorded as non-revolving debt on your credit reports which is better than revolving (credit card) debt because it has a fixed payoff date and payments. Paying off your revolving debt with a non-revolving loan helps shifts your credit reports to better types of credit, which accounts for a tenth of your score.
Long-term loans can also help to fix your credit through the amount of debt you have relative to available credit and your monthly payments. Paying off credit card debt through a consolidation loan will usually lower your monthly payments. You’ll still have the same amount of total debt, until you start making the payments on your loan, but your available credit will be higher and you won’t look like a credit risk.
Don’t miss these 21 steps to fix your credit score in six months or less
How to Get a Long-Term Loan Online
One of the fastest websites to get a personal loan is the loan aggregator PersonalLoans.com
As with most online loan sites, you need to be at least 18 years old and will generally need income of $2,000 or more per month to get approved. One of the advantages of the loan website compared to other sites is that several lenders in the network will make loans to self-employed borrowers as well as those on social security or other fixed-income sources. Loans from $1,000 up to $35,000 are available on terms of a year or more with fixed payments made monthly.
Borrowers from 48 states can fill out an application, sorry North Dakota and Maine, and a credit score of 580 FICO or higher can usually get approved. You’ll first fill out some basic information like your contact info, driver’s license number and social security number as well as how much you are looking to borrow. This is so the site can do a soft inquiry on your credit report. It doesn’t affect your credit score but allows the site to verify your information and estimate an interest rate.
This first verification process is almost immediate and you’ll get a few offers for your loan from different lenders. You’ll be show the interest rate, monthly payments and the total amount you’ll be paying on the loan over however many years you selected. This is the most important step because you really need to decide if you need the money and will be able to make the monthly payments. Long-term personal loans can be a great way to pay off credit card debt and increase your credit score but rates can get high for bad credit borrowers.
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Besides the large lending network, another reason I like the online loan site is the three types of loans available to borrowers. You’ll usually be able to select from peer loans, personal installment loans or traditional bank loans. Each one has different advantages and different requirements but the site makes it pretty easy to understand your options.
There are a couple of complaints on the BBB website but the loan website has a good reputation with most borrowers. I’ve read through the complaints and am not sure I really believe one of them because the facts just don’t add up. Loan providers regularly scan review sites to leave bad complaints from ‘anonymous’ customers to make the competition seem worse than it is.
When your loan is funded, it will be deposited directly into your bank account and monthly payments will start in 30 days or more. Payments are usually by direct debit so make sure you set up an email reminder to make sure you’ve got money in the account to make the loan payment. Your interest rate and payment won’t change and you’ll pay off your loan on time.
Long-term loans and personal loans can be a great way to improve your credit score, especially if you’re locked out of other types of credit because of your FICO score. Make sure you set a budget you can keep and make at least the minimum monthly payment. Most personal loans don’t include an early payment penalty so you can really save on interest by making extra payments. Check out your options on PersonalLoans.com