Building Your Credit Through Personal Loans

Building Your Credit Through Personal Loans

It’s an unavoidable fact of modern life: credit is incredibly important to almost every financial transactions that you make. Your credit rating is checked whenever you apply for a credit card, a rental or a utility hook-up. If you don’t have a credit history, chances are good that you won’t be approved. The dilemma, of course, is that you cannot establish a credit history until someone gives you credit. So how exactly do you build credit?

To obtain a credit score, you need to have at least one account that has been open for six months or longer, and at least one creditor reporting on your activity in the past six months.

Most people assume that credit cards are the best — and simplest — way to establish a credit history. While credit cards are often available to first time borrowers, they may not be the best option, especially since so many people make only minimum monthly payments leaving them with credit card debt for years.. A credit card may also tempt you into spending more than is advisable, leading to debt and potentially a bad credit score. Instead of opening a credit card, consider a personal loan as a better option for establishing credit.

A personal loan can be used for just about anything. Personal loans can either be secured — i.e., guaranteed by putting up collateral, like a car — or unsecured. Secured loans will typically have lower interest rates and a longer repayment period. Unsecured loans have higher interest rates and are harder to obtain, but do not require you to provide an asset as collateral.

If you’re trying to build credit, start with a small, manageable loan to ensure that you are able to pay back the loan on time — or even ahead of time. Depending on the lender and the laws in your state, minimum loans can range in size from a few hundred dollars to a few thousand.. Providing collateral will make it easier to obtain a loan, and will result in a lower interest rate. While you may be wary of putting up their car or other personal property as collateral, remember that lenders don’t want your stuff; they want you to pay back the money. This makes them more willing to work with borrowers to get the loans repaid. If possible, ask a trusted family member or friend with a good credit history to co-sign your loan. Having a co-signer on the loan can increase the chances of loan approval, and usually with a lower interest rate. Keep in mind, however, that the co-signer will be on the hook for the loan if you do not pay.

A personal loan builds credit in much the same way that a credit card does — and with the benefit of a fixed monthly payment for a fixed term. Once the loan has been approved, the payments will be reported to the credit bureau. Consistent on-time payments, paying more than the minimum amount due and paying off the loan quickly will all contribute to a favorable credit score. Paying off even a small loan in a timely manner will help you to not only build credit, but to establish a good credit history.

Building credit can seem daunting, but a personal loan is a great way to start the process. By taking out a small personal loan and consistently making on-time payments, you can establish a solid credit history — and be well on your way to a successful financial future.