Le Dialogue Sur L'aluminium
The concept of using a debt, like a personal loan, to restore one’s credit may seem perplexing at first. After all, how can going into more debt possibly have any positive effect on one’s credit report? You might be surprised to learn that personal loans are used to restore damaged credit all of the time.
However, this is only true if you have the means to repay the loan as it is expected by the lender. Late payments or, even worse, loans that have gone into default due to non-payment can do some serious harm to a person’s credit. It is only when the individual can repay their debt reliably and responsibly that personal loans may improve their credit situation.
There are two ways that taking out a personal loan – and paying your installments on time and in full – can boost a person’s credit score.
When a person initially receives the loan, it can cause their credit score to dip a few points. However, as monthly payments are made, this effect starts to reverse. Credit reporting agencies like to see that a person can pay their debts on time each month.
When the debt is fully paid and the account with the lender is closed, these agencies look upon this very favorably. By the time this happens, a person’s credit score can receive a surprising boost.
In addition to paying monthly debts on time, credit reporting agencies also like to see that a person knows how to handle numerous kinds of debt responsibly. This is called “diversity” within one’s credit history.
For example, if you have only possessed credit cards with no other lines of credit, this shows very little or no diversity. The inclusion of a responsibly-paid personal loan on one’s credit is an easy way to achieve some diversity. If the borrower can keep on-track with their installation payments, this shows the reporting agencies that they are quite capable of managing more than one form of debt.
Credit Card Consolidation
Some people have found that their credit scores improve after using a personal loan to consolidate their credit card debt. Using a personal loan to pay high-interest credit card debts absolves the debts and compiles numerous lines of credit into one relatively low-interest monthly payment.
Because the credit cards are paid off (in full or in part) and the borrower is making reliable monthly payments on their personal loan, this reflects more positively on one’s credit report. It shows that the individual has repaid several of their outstanding debts and are now being responsible with this new loan.
In short: Good credit practices paired with personal loans can be the exact thing that’s needed to drive a credit score upward.
Personal loans are commonly utilized to help bridge the gap between the money that people have and the money that they need. The uses of personal loans are numerous and widely varied, ranging from the payment of emergency circumstances to helping individuals pay for the honeymoon of their dreams. Whatever the reason may be for taking out the loan, there are three distinct benefits that all personal loans offer to borrowers.
Credit Card Interest Rates are Much Higher
One of the most common uses for personal loans is the consolidation of credit card debt. If you have more than one card especially, you are likely paying a tremendous amount in interest fees alone each month. A personal loan allows you to pay off your balances, possibly even in full, so that you are no longer trapped by sky-high interest rates.
Personal loans do charge an interest rate as well, of course, but the average personal loan still has a lower interest rate than the average credit card. By consolidating credit card debt this way, you can cut your interest rate payments in half – and in no time at all.
You Can Use a Personal Loan for Anything
Personal loans can be used to pay for pretty much anything, with a few exceptions. For example, you cannot use the money from a personal loan as a down payment on a new home. Beyond the few exceptions, you can fund whatever you want or need with a personal loan.
Here’s a short list of what personal loans are often applied to:
- Home renovations
- Veterinary bills
- Education expenses
- Vacations and honeymoons
- Wedding expenses
- Paying back a friend or family member
If you need money for any specific reason, it’s almost guaranteed that a personal loan can help you out.
Your Credit Report Will Show More Diversity
Credit reporting agencies love to see that an individual is capable of handling different types of credit and paying different forms of debt. This is referred to as diversity. Having only one form of debt on your report, such as strictly using credit cards, is not necessarily a bad thing, but it will not help your credit score improve.
Responsibly managing different forms of debt, on the other hand, can kick your credit score up a notch.
With this information in mind, you might be less hesitant to apply if you ever find yourself needing a personal loan in the future.