How an installment loan can affect your credit score
iQuanti: Installment loans allow you to borrow money at a fixed interest rate and pay it back in fixed monthly installments of principal and interest. You can use them for a variety of purposes, such as refinancing debt, financing a home improvement, or building an emergency fund quickly.
If you’re working on building or repairing your credit, knowing how these types of loans can improve or hurt your credit score is essential. Let’s take a closer look at how an installment loan can affect your credit.
1. Applying for a loan can hurt your credit score slightly
When you apply for an installment loan, some lenders will do a thorough investigation, which means they will formally review your credit score and background. These challenging surveys damage your score a bit. However, as you increase your score over time, Serious Inquiries do less damage each time you get one. In addition, serious inquiries disappear from your credit report after two years. When they fall, your credit score may rise.
While it can be difficult to find installment loans without a credit check, many lenders will only conduct an informal inquiry during the approval decision process. Soft credit checks will not affect your credit score and will only be visible to you.
4. Making payments on time can boost your score
Two of the main factors used to calculate your score are your payment history and the length of your credit history. For this reason, making payments on time each month can add up significantly when it comes to improving your score. Likewise, missing payments can hurt your score, so try to make all your payments on time.
2. Adding the loan to your credit mix can improve your score
Your credit composition is an important factor in determining your credit score. It looks at the number of credit accounts you have opened and their diversity. By taking out an installment loan, you increase the number and diversity of your credit accounts, which can help boost your score quite quickly.
3. Paying off credit cards with the loan can improve your score
Credit utilization is another factor used to calculate your credit score. It measures the amount you borrow on your revolving credit accounts (credit cards and lines of credit) against your credit limits on those accounts. So if you get an installment loan to pay off your credit card balance, you could improve your score by reducing your credit usage.
The bottom line
Installment loans can impact your credit in several ways. The first thorough investigation hurts your score slightly, but you can easily make up for that damage by making timely monthly payments. Plus, adding the loan to your credit mix and using it to reduce credit card debt could provide another credit boost. Overall, be sure to only borrow what you can afford to repay to reap the benefits of installment loans.
Notice: The information provided in this article is provided for guidance only. Consult your financial advisor about your financial situation.
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Original Source: How an Installment Loan Can Affect Your Credit Score