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Do Installment Loans Build Credit?
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Do Installment Loans Help Build Credit?
Credit bureaus that report loans as being paid consistently on time can help build credit.
By Bev O’Shea personal finance writer | MSN Money, Credit.com, Atlanta Journal-Constitution, Orlando Sentinel Bev O’Shea is a former NerdWallet authority on consumer credit, scams and identity theft. She has a bachelor’s diploma in journalistic studies from Auburn University and a master’s in education from Georgia State University. Before coming to NerdWallet she was employed by newspaper publishers, including daily ones, MSN Money and Credit.com. Her work has been featured on The New York Times, The Washington Post, the Los Angeles Times, MarketWatch, USA Today, MSN Money and elsewhere. Twitter: @BeverlyOShea.
Mar 8, 2019
Written by Kathy Hinson Lead Assigning Editor Personal finances, credit scoring financial management and debt Kathy Hinson leads the core personal finance team at NerdWallet. In the past, she worked for 18 years with The Oregonian in Portland in positions such as copy desk chief and team leader for design and editing. Previous experience included copy editing and news for various Southern California newspapers, including the Los Angeles Times. She earned a bachelor’s degree in mass communication and journalism from Iowa’s University of Iowa.
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An installment loan will benefit your credit in a big way if you pay as agreed. It may also help in a small way by providing you with a better credit score if you just have credit cards.
Here’s what you need to be aware of about how installment loans could affect your .
What is an installment loans?
It is required that you have equal payments for a set period until the loan is paid off in full. The car loan is an example, but there are a variety that offer installment loans.
Installment accounts differ from those that are typically credit cards. For revolving accounts, the monthly payment amount varies and there’s not a set expiration date.
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How do installment loans impact your credit score?
Installment loans can boost your scores when:
You pay punctually. Installment loans are a great way to build credit if you are consistently making timely payments and the lender reports your activity to one or more credit bureaus. This is a record of your payments therefore having a track record of timely payments will help your credit score, but could seriously damage your score. The loss of a house or car to repossession or foreclosure could ruin your credit.
You have only credit cards right now. A smaller factor in scores is the mix of accounts. If you only have installment debt helps diversify your credit types and might bring you a small bump.
Your credit utilization drops. In the end, if you take an installment loan to pay off credit cards such as a credit card your credit score could benefit. The transfer of credit card debt onto an installment loan will lower your score . Utilization refers to the amount of your credit card balance relative to your limit. It’s a major element in your credit score. Moving debt onto an installment loan can instantly reduce the overall use of your credit card and per-card.
Making an application for any credit service may temporarily wipe several points off your credit score due to an inquiry from a creditor. The checks are known as ” ” and are noted upon your credit reports.
Are you able to get an installment loan in order to increase credit?
It’s not recommended to take out an installment loan solely to boost credit, but there’s one exception: As their name suggests the goal of building credit is the primary reason for existing. When you have no credit or thin credit, these installment loans could help you to build your credit score.
After a credit-builder loan is approved, the loan is then deposited into the form of a savings account or certificate. The money is not transferred to you until you have paid off the loan.
By paying on time, you build your credit score, and you’ll have a nice emergency fund when you’re finished paying off the loan. However, not paying on time hurts your credit, and the amount you borrow could cause financial strain and lead to unpaid payments.
Be aware of your performance
As you earn credit, you’ll need to watch your growth. You can review your credit score, and also have a summary that is regularly updated, via NerdWallet. In addition to tracking scores, you are able to check your credit utilization and other scoring factors.
About the author: Bev O’Shea was a credit reporter at NerdWallet. Her work has been featured in publications such as the New York Times, Washington Post, MarketWatch and elsewhere.
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