3 Tips for Using an Installment Loan to Improve Your Credit Score

If your credit score is poor due to the fact that your credit history isn't very long, you may want to consider improving your credit with an installment loan. These loans provide you with instant funds, and they're paid back slowly over a long period of time. Paying off an installment loan allows you to demonstrate the ability that you can make on-time payments to future lenders, which helps boost your credit score. Below, you'll learn three tips that will help you successfully use an installment loan to improve your credit.

1. Pay Off Some Credit Card Debt With Your Loan Payment

When you're using an installment loan to improve your credit score, it's best to pay off a portion of your revolving debt with the funds you receive from the loan. A large portion of your credit score is based on your revolving credit utilization, which is a measure of how close you are to the credit limits on your credit cards — if you're nearly maxed out on all of your cards, your credit score will take a large hit.

Using the installment loan to pay down your credit cards will reduce your credit utilization, which helps to improve your score. In addition, you'll also lower your monthly payments on your credit cards, which enables you to make the monthly payments on your loan more easily.

2. Look for a Long Loan Term

The main purpose of using an installment loan to build your credit is that it shows lenders you're able to make consistent payments over a long period of time. For building credit, it's preferable to look for a loan that you pay back over the course of several years, as this is the best way to represent to lenders that you're capable of budgeting your money and making on-time payments. While you'll pay more in interest for a long-term loan compared to one that you can pay off quickly, you can keep the overall amount of interest that you pay small by not taking out a large loan in the first place — making consistent payments is typically more important than the size of the loan.

3. Budget Accordingly for Your Monthly Loan Payments

Finally, you'll need to make sure that you have no trouble making payments when you're using an installment loan to improve your credit. Late payments will cause your credit score to immediately decrease, and they'll continue to affect your score until they finally drop off your credit report in a few years. If any of your loan funds are left after paying down your credit card debt, you may want to keep it in savings. This provides you with a buffer that allows you to make payments even during times of financial hardship.

In addition, it's also a good idea to contact your installment loan lender immediately if you think that you will have trouble making a payment, since you may be able to make a payment arrangement with your lender that will prevent a late payment from appearing on your credit report.

If your credit history is sparse, an installment loan is an excellent way to help build it. These types of loans are often easy to get, even when your credit score is poor, and they provide you with the ability to prove to future lenders that you're capable of making on-time payments over the course of a few years. If you're looking for a way to help improve your credit score, search online for installment loan lenders and go through the pre-approval process — you'll get a better idea of how much you can be approved for and the interest rate you'll be able to secure.

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