How an Installment Loan Could Improve Your Credit Score

NEW YORK, February 17, 2023 (Newswire.com) - iQuanti: An installment loan can help a borrower cover a variety of expenses like car repairs, medical bills, and home improvement projects. The borrower receives a lump sum of money upfront and will repay the loan over time with fixed monthly payments. Paying down an installment loan may also improve the borrower's credit score. Here's a closer look at how an installment loan could improve your credit score.  

How an installment loan could improve your credit score 

There are several ways an installment loan could boost your credit score, including:  

Credit Mix: Your credit score benefits when you are paying off different kinds of debts such as installment loans, credit card balances, and home mortgage obligations. An installment loan can diversify your credit mix and may positively impact your score.  

Payment History: Payment history makes up 35% of your credit score. This is because the credit bureaus want to see that you're a responsible borrower who's committed to making on-time payments. If your payments are on time, every time, carrying an installment loan may improve your credit score. 

Credit Utilization Ratio: Credit utilization refers to how much credit you are using compared to how much credit your lenders have made available to you. If you take out an installment loan to pay off a credit card balance, you could be reducing your credit utilization ratio and could improve your credit score.  

How an installment loan could hurt your credit score 

While an installment loan could help your credit score, it might also hurt it. Here's how. 

Hard Inquiry: When you apply for an installment loan, the lender will likely perform a hard inquiry and pull your credit report so it can determine whether it will lend you money. A hard inquiry can temporarily cause your credit score to drop by a few points.  

Length of Credit History: The average length of your credit history accounts for 15% of your credit score. Typically, the longer your credit history, the more your score will benefit. A new installment loan will reduce your average length of credit and may lower your score. 

Additional Debt: Many people take out installment loans to cover emergencies or large expenses. However, taking on an installment loan may result in overextending yourself and negatively affecting your debt-to-income ratio. This can lead you into a cycle of debt and harm your credit score.  

How to find the right installment loan 

Consider these factors if you decide you need to take out an installment loan to pay for an expense: 

Interest Rate: The lower the interest rate, the less you'll spend on the loan overall. By shopping for the lowest possible rate, you can save hundreds or even thousands of dollars in the long run. 

Loan Terms: While a longer term means lower monthly payments, it will also cost you more in interest. On the flip side, a shorter term leads to higher monthly payments but can save you a lot in interest charges. 

Fees: Many lenders charge fees in addition to interest, such as origination fees, application fees, and late fees.

The Bottom Line 

Since taking on an installment loan may positively impact your credit mix, payment history, and credit utilization, it could improve your credit score. But applying for or taking on an installment loan can also hurt your score if it leads to a creditor's hard inquiry, reduces the average length of your credit history, or results in taking on too much additional debt. Remember, if you choose an installment loan, be sure to make your payments on time and you could see your credit score slowly but surely improve.  

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