3 Ways a Personal Loan Can Help Your Credit Score

A couple meets with a banker to discuss their finances.

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There are benefits to this specific borrowing option.

Key points

  • A personal loan lets you borrow money for any purpose.
  • Being timely with one could help your credit score in different ways.

Any time you borrow money, you run the risk of falling behind on a loan and seeing your credit score take a big hit. And that’s why it’s important to borrow carefully. But if you need money for a pressing matter, like a home repair, a vehicle repair, or a renovation that will have a significant impact on your comfort and quality of life, then you may want to consider taking out a personal loan.

The benefit of getting a personal loan is that you can use the proceeds for any purpose. That gives you a lot of flexibility. Plus, personal loans tend to charge competitive interest rates, especially compared to credit cards.

Meanwhile, taking out a personal loan may do more than just give you access to the funds you need. It might also help give your credit score a lift. Here are a few ways a personal loan can lead to a higher credit score.

1. Timely payments can work to your benefit

Of the various factors that go into calculating a credit score, your payment history carries the most weight. It speaks to how timely you are in paying bills. If you make your personal loan payment every month on time like you’re supposed to, that positive activity will get incorporated into your payment history.

2. A longer-standing loan could reflect well on you

Another factor that goes into calculating your credit score is the length of your credit history. Having longer-term loans and credit accounts open is a positive thing when it comes to credit scores. So if you mostly have credit cards that have been open for a year or less, and you take out a personal loan with a five-year repayment plan, that longer-term loan could reflect positively on your credit (provided your loan remains in good standing).

3. Non-credit card debt could lead to a healthier credit mix

Your credit mix is yet another factor that’s considered when calculating your credit score. It speaks to the various types of loan or credit accounts you have open. Lenders generally like to see debts other than just credit cards. So if your current credit mix is a handful of credit cards only, and you add a personal loan into that equation, it could result in a higher credit score.

Is a personal loan right for you?

Borrowing money via a personal loan makes sense when you have a financial need you’re trying to address. You generally shouldn’t, for example, take out a personal loan for the purpose of being able to go on vacation or upgrade your wardrobe. But if you’re running out of space at home and you need a personal loan to finish your basement, that’s a different story. And if you need a loan to fix up your car so it’s safer to drive, that, too, is a scenario where it makes sense to borrow.

The key, however, is to run the numbers and make sure you can easily keep up with your monthly personal loan payments. Falling behind could drag down your credit score — and that’s really not what you want.

Our picks for the best personal loans

Our team of independent experts pored over the fine print to find the select personal loans that offer competitive rates and low fees. Get started by reviewing our picks for the best personal loans.

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