Bad credit loans can seem like a miracle if you’re really strapped for cash and you’ve got bills or other expenses that need covered quickly. However, there are plenty of reasons for getting a personal loan for poor credit aside from emergency situations. It could also be a feasible way for you to begin to turn your low credit score into one you can be proud of.
Here’s How Bad Credit Loans Can Boost Credit Score
There are actually a few reasons using a personal installment loan can help improve your credit score, and if you can benefit from more than one of the options, you might get a double whammy of credit improvement. Some of them may not necessarily apply depending on your credit situation, but chances are, there’s at least one way that will make a positive impact on your low score.
Build a Credit History
It seems kind of silly when you say it aloud, but you’ve got to borrow money before most lenders want to lend you money. People who haven’t really utilized credit in the past start out with a low score that they must build up by borrowing money and paying it back on time.
It seems a little unfair that people with no credit don’t qualify for many loans despite that they’ve done nothing wrong, but they’re an unknown entity to lenders until they have a decent credit score that displays their dedication to paying back money they’re borrowed. That’s why personal bad credit loans are handy for more than just those with damaged credit.
Those with damaged credit can also use these fast loans for bad credit to begin building their credit score back up. The key is to make each and every payment on time. Some bad credit loans are even designed to help people build their credit, whether it’s from scratch or after hitting rock bottom.
It’s important to note that if building credit is the only applicable reason for you to take out a personal installment loan, it will be slow going. In fact, you will likely see a slight drop in score initially if neither of the other two reasons apply, especially if the loan you’re looking at requires a credit check.
Add an Installment Loan to Your Credit History
One of the factors that affects credit score is credit mix. The term credit mix refers to the ratio of different types of credit accounts you have open, including credit cards, personal loans, student loans, car loans, and mortgages. Whether you have an ideal mix of credit types determines 10% of your credit score.
Your credit score may benefit from taking out a fast loan for bad credit if you’re lacking installment-type loans amongst your open accounts. This means that if you don’t already have a personal loan, car loan, mortgage, or other installment loan open currently, you might see a boost from adding one.
Use Personal Loans to Pay Down Revolving Credit
If you use a bad credit loan to pay down (or pay off) revolving credit, you could make a major impact on your credit score. This is one of the double whammy moments mentioned at the beginning of this article. Read on to learn how it could work to swing your credit score in the right direction.
Another factor that determines your credit score is your credit utilization rate, or what percentage of the credit your lenders were willing to allow you to borrow that you’ve actually used. By taking out a personal loan to pay down your revolving credit balances, your credit utilization rate goes down which in turn makes your credit score go up.
This option provides an added benefit: you may pay less for your monthly payments, and it’ll cost you less in the long run, as well. Most revolving credit comes with high interest rates which can make for high payments or payments that don’t get you much closer to getting the balance paid off. Personal loans, even ones that are made for bad credit, have a lower APR than most credit cards and therefore cost less.
Could a Personal Loan Work to Improve Your Credit?
It might, but it might not. That will depend a great deal on your current credit score and your credit history. Your situation may counteract one or all the ways that taking out a bad credit loan can help build good credit. Review each of the reasons above while taking a look at your credit so that you can evaluate whether it’ll help or hurt you to take out a personal loan.
If you need to know how to apply for a bad credit loan, consider using the Loans Now Discovery Process, where a member of our staff will help you find the best loan possible and then show you how to apply.
How Quick Can a Personal Installment Loan Improve Your Credit?
The answer to this question is variable. If you’re only looking to establish a credit history with this bad credit loan, it’ll take months, maybe even years to make a big impact on your credit score.
If you’re looking at a fast loan for bad credit to add variety to your credit mix, you may see a slightly faster rebound if you had plenty of revolving credit accounts but were lacking installment loans on your report. However, it’ll make more of a difference a year or so down the line if a hard inquiry was reported since those will be reflected in your score for that long.
The Problems with Improving Credit with a Personal Loan
There are a couple inherent issues with taking out a loan specifically to improve your credit. Make sure you’re aware of the potential problems before you decide if it’s a viable option for you.
First off, it’s difficult to predict exactly how taking out a new loan will affect your score. You can get an idea based on how credit scores are figured, but the effects could be unpredictable. It might not help as much as you’d hoped, or it could potentially even hurt your score for a while. This is one reason why it’s not recommended that you take out a loan just to improve your score.
Next, you may need to address revolving credit instead of installment loans to make a real impact on your credit score. If you’ve got plenty of installment loans but are lacking in revolving credit accounts, check out the best credit card offers available to you and consider choosing one of those, instead. Once you’ve taken a company up on a great credit card offer, remember: a low credit utilization rate also helps your score!