Personal loans can be a useful tool for building credit. As with most tools, it really comes down to the way you use your loan. When you make consistent, on-time payments, a personal loan can help you get the money you need now while taking care of your credit.
How does a loan help build credit?
Your credit score is calculated from five factors, each making up a percentage of your overall score. Of the five factors that influence your credit score, personal loans impact four.
Payment history
Accounting for 35% of your entire score, payment history is the most important factor of credit. When payments are missed or when payments are made on time, this factor tracks it and reflects it in your credit score.
A personal loan creates an opportunity to make regular payments and establish a positive payment history.
Credit usage
Credit usage shows how much available credit you have (ie. how much of you’re using). It can reveal how much you rely on non-cash funds in your day-to-day life. It’s best to use about 30% or less than your available credit.
Having a personal loan that you pay off each month shows that you’re able to manage credit well.
Length of credit history
This factor measures how long your credit accounts have been open. The longer you’ve held individual credit accounts, the better.
If you have little or no credit history to show, personal loan is a smart way to establish credit history.
Credit mix
A variety of different credit accounts that show a big picture of how you manage credit – that’s what credit mix is.
If you want to work on this factor, a personal loan can provide another type of account for your credit mix.
If I miss a loan payment, does it hurt my credit score?
Like we said, a personal loan is a tool. It’s all about how you use it.
If you miss a loan payment, it will affect your credit score. A missed payment influences the payment history factor of your credit score. If missed payments continue, if it can reflect an inability to stick with payments.
Your credit is a fluid thing, though – it’s always shifting along with your financial activity. One missed loan payment, while not ideal, won’t make or break your credit score. Stick with it for the long run. If you miss a payment, dust yourself off and do your best to get back on track with consistent, on-time payments.
If you happen to have a personal loan with World and are struggling to make monthly payments, reach out to your local branch. We will help you get back on track and do our best to keep it from affecting your credit score.
What is the best way to build credit with a loan?
Hands down, the best way to build credit with a personal loan is to get on a regular payment schedule and stick to it. Loans with set terms and a fixed rate are best for this.
With set, predictable terms, you can easily know when your loan payments are due and when the terms are up. With a fixed rate, that loan payment stays the same the whole time you have the loan.
Put simply, a personal loan with set terms and a fixed rate is easy to manage and plan for – which is behavior that will show up in your credit score.
If you stick with payments, a personal loan can help you build credit.
Whether you're looking to get your credit score off the ground, rebuild damaged credit, or make your credit score stronger, a personal loan can be a smart tool for credit. When you stick to a payment plan, you can make a personal loan work for you – for funds up front, and a better credit score down the road.
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