Do you have good or bad credit? Do you even know?
What is Credit?
In this case, the word “credit” refers to your credit score. Your credit score, also known as your FICO score, is a numerical value derived from criteria established by the Fair Isaac Corporation, a data analytics company. This score is widely used by lenders to assess your eligibility for credit cards, mortgages, and other loans. In addition, your credit score influences the interest rate and conditions you are offered when you are looking for a loan, so it always behooves you to have a healthy credit score.
What Is a Good Credit Score?
It is important to know, before you apply for a loan or credit card, what your credit score is and how your lender will view your score. FICO scores range from 300 to 850 and fall into one of five categories:
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Poor – 300 to 579
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Fair – 580 to 669
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Good – 670 to 739
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Very Good – 740 to 799
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Excellent – 800 and up
Even if your FICO score is only fair, you may still qualify for a personal loan. However, your interest rate will likely be higher; therefore, you will wind up paying more for the same loan than another borrower with better credit.
How Can You Improve Your Credit?
You can improve your credit score if you understand how your score is derived. Since your FICO score is intended to predict your creditworthiness, or the likelihood you will repay your debts, it is based primarily on your payment history.
Pay Your Bills On Time
You can improve your credit score by paying your bills on time every month. The easiest way to ensure you never miss a payment on recurring bills, such as utility bills and rent, is to set up automatic payments.
Establish Credit History Early
Lenders want to know that you have made payments on time for a long time. In other words, they want borrowers to demonstrate a lengthy credit history. While you can’t go back in time to change the past, you can still impact the future by obtaining a credit card or personal loan sooner rather than later.
Diversify Your Credit Portfolio
You can improve your credit score by demonstrating to lenders that you are adept at handling a variety of credit types. Credit falls into two main categories:
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Revolving – a line of credit that remains open and available, up to a certain limit, over an unspecified amount of time
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Credit cards
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Retail cards
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Gas cards
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Installment – a closed line of credit that is paid in fixed amounts over a set period of time
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Personal loans
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Auto loans
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Student loans
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Mortgages
How Can a Personal Loan Improve Your Credit?
If you haven’t yet established a credit history—or you’ve established a poor one—a personal loan, handled wisely, can help you raise your FICO score.
By Leveraging a Personal Loan to Strengthen Your Payment History
A personal loan can strengthen your payment history by demonstrating your ability to pay monthly installments on time. It is relatively easy to qualify for a personal loan, so most borrowers can obtain one for any reason, even just to enhance their payment history.
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Personal loans typically range from $500 to $10,000.
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Personal loans are usually repaid in monthly installments over 12 to 60 months.
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Personal loans are calculated with simple interest, so the principal and interest never change as long as payments are made on time.
Payment history accounts for as much as 35% of your overall credit score. Show lenders that you can pay your monthly payments on time every time by taking out a small, short-term personal loan. Take advantage of automatic payments, if available, to ensure you never miss a payment. Talk to your lender about setting up an autopay plan.
By Taking Advantage of a Personal Loan to Establish Credit History Early
You can take advantage of a personal loan to establish credit history early. Personal loans make it easy for beginning borrowers because they are typically small sums of money paid back over a relatively short period of time.
A personal loan is better than a credit card for establishing credit history because
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A personal loan is an installment loan, which means borrowers receive a particular amount of money that is paid back over a specified period of time. A credit card is a revolving line of credit that encourages inexperienced borrowers to spend more than they intend.
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A personal loan is calculated with simple interest, which means the principal and interest will not increase as long as payments are made on time. A credit card is calculated with compounding interest that allows novice borrowers to pay a minimum payment, increasing the likelihood that the balance plus interest will grow exponentially.
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A personal loan typically has a lower interest rate than a credit card. In 2024, the average interest rate for a personal loan was 12.21%, while the average interest rate for a credit card was 24.62%.
Length of credit history accounts for up to 15% of your overall FICO score. You can’t go back in time, but you can start now. Take out a personal loan to begin establishing a lengthy credit history. Your credit score will increase incrementally as time goes on so long as you make your monthly payments on time.
By Using a Personal Loan to Diversify Your Debt Portfolio
You can use a personal loan to diversify your debt portfolio, ensuring you have a mix of revolving lines of credit and installment loans, to prove your creditworthiness to lenders.
If you already have a credit, retail, or gas card, you have a revolving line of credit. To assure lenders that you have experience handling a variety of loan types, you need to add an installment loan to your debt portfolio. Other installment loans, such as auto loans, student loans, and mortgages, are usually for larger sums of money with longer terms, so a personal loan is a better choice.
Credit mix accounts for only 10% of your credit score, but taking out a personal loan is possibly the quickest and easiest way to boost your credit score even just a little. Obtaining an adequate credit mix can make the difference between being considered fair, good, very good, or excellent at handling credit. In other words, it can make the difference between getting a loan or not and determine the interest rate you are offered.
A personal loan can improve your credit if handled properly. Talk to an experienced loan officer at AMG Finance about raising your credit score with a short-term personal loan.
