As soon as I realized that my personal financial picture was a little bleak, I started thinking about taking out a personal loan. I wasn't really looking forward to going into debt, but I knew that if I wanted to solve a few short-term problems, a loan would be the way to go. I talked with a few of my local financial institutions to get a good idea of what they could offer me, and then I sat down to go over the paperwork. It was incredible to see how much money I could save by securing a lower interest rate. Check out my blog for more information about loans.
If you are a young adult just starting out on your own, qualifying for a small unsecured personal loan can help you establish a credit history. But when building credit, there are certain measures you can take to successfully accomplish the task.
1. Make Timely Payments
Your payment history plays a huge role in calculating your credit score. That's because when creditors check your credit profile, they like to see that you consistently make your monthly debt payments—installment or otherwise—on time.
When you take out personal loans, the lender will report your account to the credit bureaus on a regular basis while you repay the loan. As long as you pay by the date due each month, you'll be contributing toward building a positive credit history.
2. Vary Your Credit Mix
Whether you apply for a personal loan at a bank or credit union, a personal loan adds another credit type to your credit history. The same as making timely payments, having a mix of credit types on your report shows creditors that you can responsibly handle various types of credit.
Although your credit mix accounts for only 10 percent of your FICO credit score, credit scoring models may place more weight on it if your credit report doesn't contain much other information. But don't apply for a personal loan simply for the sake of adding an installment loan to your credit mix. The loan needs to make sense for you, and you must be able to afford the fixed monthly payment.
3. Get a Co-Signer
Keep in mind that a lender takes a risk giving you a loan that you don't secure with collateral. Therefore, if you are having trouble qualifying for a personal loan because of a short or no credit history, ask a parent or other family member who has an established credit history to co-sign a loan for you.
When someone co-signs a loan for you, the lender considers the co-signer's credit history when qualifying you. If that person has a high credit score, you may even qualify for a lower rate of interest on the loan.
Be certain to make all the monthly payments on time until you pay off the loan. Otherwise, you won't be building a strong credit history and you'll be damaging the co-signer's credit as well. Late loan payments are a quick way to bring down a credit score. However, if you make all the payments on time, you'll be boosting both your credit score and that of the co-signer.
Building credit takes time, but when you pay off a personal loan in full and on time, you are proving your credit-worthiness by showing future creditors that you know how to use credit wisely.Share
20 April 2017