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Building and maintaining a good credit score can be a daunting task. One of the best ways you can improve your credit scores is to get a personal loan. You may think that going further into debt is not a good way to boost your credit. This is true, but if you use the loan to restructure your debt, it can help your standing with the three major credit bureaus a good deal.
Why You Should Get a Loan
There are two types of credit. Revolving credit lines such as credit cards and installment credit lines like personal loans or car loans. Mortgages are also another form of installment credit lines. One of the best ways to improve your score is to have a healthy mixture of both on your credit report. They key thing to remember is to have both, but do not go overboard and get every type of credit you possibly can. Too many accounts on your credit report can be as bad as not having enough. Another advantage to personal loans is that you are required to make a fixed monthly payment. Many people get behind on their bills and just make minimum credit card payments; in the meantime, they end up paying a fortune in interest. With a personal loan, you pay a pre-determined monthly payment that includes the interest plus part of the principle. It is also possible in many cases to use a lower-interest personal loan to pay off high-interest debt like credit cards.
Tips for Getting a Loan
The process of getting a personal loan is different for everybody. Some people go the credit unions, others go through banks, and many go through online sites. In all cases, your credit rating will determine your choice of available lenders. As a rule, the higher your credit score is, the better the interest rates will be on your loan. However, even if your credit score is not so good, a high-interest loan is still worth considering for reasons that will be discussed later. One thing that can help you get a better interest rate is if you have some sort of collateral, you can borrow against like your 401k plans. If you can find a co-signer, that can help too. Banks look very favorably upon co-signers because they know that if for some reason you fail to repay the loan, the co-signer is also legally responsible for paying off the debt. Be patient and spend some time searching all your available alternatives. Do not just accept the first offer you receive. Additionally, do as much research as you can before you apply for the loan so that you do not run up too many inquiries on your credit report because many inquiries coming in over a short period will actually hurt your score.
What to Do After You Get Your Loan
Your first temptation may be to take your newly acquired funds may be to spend the money. This is the worst thing you can do because defeats the biggest benefit of getting a personal loan in the first place. The smart way to spend your money is to pay off some of your credit cards. The best way to cope with your debt is to use the loan money to consolidate it. As mentioned earlier, even if the initial interest rate you receive on your loan is high, it will still likely be lower than the interest rate on your credit cards. Additionally, after you make six months to a year’s worth of payments on time, you may be able to refinance your loan and get a lower interest rate. Pay off and reduce as many of your credit card balances as possible. However, do not cancel the credit cards once you pay them off. Another reason using a personal loan for debt consolidation is such a good idea is that it improves your available credit to debt ratio. Credit bureaus and lenders look most favorably upon people who have a good amount of available credit, but do not have high balances on their accounts.
Personal loans are harder to get than credit cards, but that is also part of why they look so favorable on your credit report. You build credit-worthiness by building trust. If a company trusts you enough to give you a personal loan, then it is a good reflection of your ability to pay back your debts. With a good credit score, your financial future will definitely look brighter.