How a Personal Loan Can Help Your FICO Score

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Written by Guest | Last Updated November 1st, 2019
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A well-kept historic home

If it's time to make a big purchase such as a home or a car, or even if you are trying to qualify for other types of credit, your credit score should be of major concern to you. After all, your credit score will play a part in determining how much you can qualify in a loan, or if you can even qualify at all.

Obviously, the better your credit score is, the more likely you are to get the loan you desire. Low credit scores often result in denials, higher interest rates or stricter loan terms. A low credit score can hamper your present and future financial status.

Ensuring your credit score is good requires sound judgment, diligence and prudence One must be disciplined and focused on both short-term and long-term goals.

If your credit score sounds the buzzers and raises the red flags, don't worry, there are ways to improve it.

Types of credit scores

Perhaps the most common type of credit score is the FICO credit score. This well-known measuring stick of your credit was introduced in 1989 and spans a range in points of 300 to 850. Factors that play into the score are on-time payments, capacity used, length of credit history, types of credit used and past credit applications.

Other score types are VantageScore, CE and FAKO.

Considerations of personal loans

The focus here will be on using personal loans to improve your FICO score and whether this is a viable, wise method.

There are pros and cons to taking out a personal loan, which can be as little as $5,000 and as much as $35,000. Obtaining a personal loan furnishes you with not only money you need for a project or endeavor of your choosing, but it gives you a vehicle to show credit reporting agencies that you can meet the requirements that are factored into a FICO score.

For instance, when you take out a personal loan it will usually be for a two- to five-year term. Assuming you are able to pay off your loan within the time frame laid out and that you make each monthly payment on time without exception, you satisfy one important requirement for your FICO score. On-time payments will indeed raise your score.

Also, obtaining a personal loan will diversify your credit mix, which accounts for 10 percent of your FICO score. When you add an installment loan to your credit cards, it makes your credit mix all the better, and it shows prospective lenders that you can handle the load of multiple credit types.

Potential pitfalls

Before getting too excited that personal loans are the key to bringing up that sagging credit, take caution. Such a loan could potentially do more harm than good.

For starters, personal loans should be considered with caution and chosen only if necessary. If you are concerned about your ability to pay them off, you should avoid them. This is because late payments can adversely affect your credit. Sure, if you make your monthly payments, you could raise the credit score, but if you have trouble making the payments, the opposite will occur. The worst thing you want to do is make your faltering score even worse. Don't put yourself in a position where you have too much debt to handle.

The Bottom Line

It is true that obtaining a personal loan has the potential to raise your FICO score, and going this route has some merit if you can safely manage the payments, terms and rate. The converse is true is well that damage to your credit is a risk, so don't make this decision without careful thought, planning and confirmation from competent advisers.

The Top Personal Loans Companies

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#1 Best Egg chevron_right
9.3 Overall Score
4.9
starstarstarstarstar_half
(7,066)
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#2 FreedomPlus chevron_right
7.1 Overall Score
4.6
starstarstarstarstar_half
(1,977)
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#3 SoFi chevron_right
6.8 Overall Score
4.8
starstarstarstarstar_half
(119)

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