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How to Improve Your Credit with a Personal Loan

You’ve probably heard time and time again that a simple way to improve your credit is by responsible and consistent use of a credit card. You might even know how to improve your credit in several ways other than using a credit card. Another potential solution to improve your credit is to apply for a personal loan. However, this is an option that should be considered with caution.

Typically, personal loans work best for those with maxed-out credit cards or those seeking to consolidate debt with abnormally high interest rates. Those with good credit scores or healthy credit card history won’t typically see any improvement to their scores with a personal loan. If you’re planning to try using a personal loan to improve your credit score or pay off credit card debt, it is essential to weigh the pros and cons.

How Does a Personal Loan Affect My Credit Score?

When it comes down to it, personal loans can be a risky way to go about improving your credit. There are more reliable ways to build your credit and repair your finances. Veterans United does not recommend using a personal loan to improve your credit score.

Pros and Cons of Personal Loans

A personal loan can potentially consolidate credit card debt and improve your credit score for several reasons, but it’s important to understand the pros and cons of going this route.

Pros of Personal Loans for Improving Credit

  • A personal loan is an installment loan, meaning this type of debt won’t hurt your credit score as much as debt on a credit card.
  • A personal loan can diversify your credit history.
  • A personal loan can decrease debt quicker.

While all of this may sound great, a personal loan can also send you into further debt if not considered carefully:

Cons of Personal Loans for Improving Credit

  • Higher interest rates
  • Fixed payment timeline, meaning more debt if the loan is not repaid in a timely manner.
  • Additional fees, especially if loan repayments are late.

Do Personal Loans Hurt Your Credit?

Like any other form of debt, personal loans can hurt your credit score if you’re not careful.

While it can be helpful for consolidating debt in some cases, treat a personal loan with heavy caution. Personal loans can be a way to pay off expensive credit card debt by freeing up your available credit limit. However, personal loans can also create an even bigger debt problem when handled improperly. Should you choose a personal loan, it is paramount that you don’t run up additional balances on your existing credit cards.

Did you know lenders will take a look at your debt to income ratio (DTI)? Learn how to calculate your DTI: Explaining the VA’s Standard for Debt-to-Income Ratio

What Happens to Your Credit Score if You Miss Personal Loan Payments?

If personal loan payments are more than 30 days late, you may face significant credit damage. You may also be subject to late fees, or even a loan default. These consequences are why personal loans should be discussed with such caution. If your goal is to improve your credit, a personal loan is only one of many options for getting back on track.

Secured vs. Unsecured Personal Loans

Decide whether a secured or unsecured personal loan would be best for you ahead of time. Here’s how each loan fares in terms of collateral, repayment period and interest rates:

Loan Type Pros Cons
Secured personal loan Longer repayment time Lower interest rates Must provide collateral
Unsecured personal loan No collateral necessary Higher interest rate More difficult to obtain

In general, secured loans are better for the long term, and unsecured loans are more beneficial in the short term. Keep in mind that there are other options to improve your score, and taking out a personal loan is not for everyone.

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