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Can Installment Loans Help Your Credit Score?

Can You Increase Your Credit Score with Installment Loans?

It may seem counterintuitive that taking out a loan can help your credit, but there are times when installment loans can do just that. The trick is that you have to be careful about these loans because, just as easily as they can help you, they can also hurt your credit.

There are a few things you should understand before you sign on the dotted line for an installment loan. Banner Finance is here to take the mystery out of managing your money so that you can take control of your financial future.

What is an Installment Loan?

Traditional installment loans (TILs) are loans in which you make equal payments over a pre-determined period of time until the loan is paid off. Examples of installment loans include car loans, mortgage loans, and student loans. In general, TILs are loans made to a customer in which the payments are made on equal monthly installments (payments) with no balloon payment at the end of the contract.

Traditional installment lenders are lenders who loan customers money based on substantially equal monthly installments with a fixed term.There are significant differences between installment loans and payday loans, and you can read about those differences here. 

Installment loans are also different than credit cards, which are classified as revolving credit. This is because the payment you make toward a credit card changes month-to-month, and there is no pre-determined end date for your payments.

How Do Installment Loans Help Your Credit Score?

There are certain situations in which taking out an installment loan can help your credit score. An installment loan can help you if you:

  • Make your payments on time. If you consistently pay on time and your lender reports your payments to a credit bureau, you can help to build a solid payment history for your credit.Payment history is the single biggest factor in determining your credit score, so on-time payments are very important. Should you become more than 30 days late on your installment loan, it will likely hurt your score.

  • Take the time to understand the terms of your loan to determine if your monthly payments, interest rate, and length, or term of your loan will truly work for you. Should you fall behind on your installment loan, call your lender to find out what it will take to get current with your account.
  • Only have credit cards currently. Credit scores factor in what types of accounts you’ve established. Diversifying your revolving credit accounts with an installment loan can give you a small bump in your score.
  • Use less credit. If your installment loan is used to pay off credit cards, your credit report will show credit available for use. This gives you a lower debt-to-income ratio. If you do this, be sure to keep your credit card balances low so that you can continue to take advantage of this credit-building strategy. Your credit card and revolving credit usage account for about 30% of your FICO credit score. Using more than 30% of your available balance has a negative impact on your credit. Lowering your credit usage by paying off credit cards with an installment loan can have a significant, and fast, impact on your credit score. In fact, it’s one of the fastest ways to improve your credit. 

Like any financial instrument, it’s important to approach installment loans seriously. Make sure you understand your repayment terms, and that they fit within your budget. Keep in mind, too, that most installment loans take time to impact your credit. You must show a pattern of on-time payments.

At Banner Finance, we do our best to educate consumers about what to look for in installment loans. Contact us today to see how we can help you gain control of your finances—and your future.

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