NEW YORK – March 5, 2022 – (Newswire.com)
iQuanti: With installment loans, you borrow money at a fixed interest rate and pay it back in fixed monthly payments of principal and interest. You can use them for a variety of purposes such as: For example, to refinance debt, fund a home renovation, or quickly set up an emergency fund.
As you work to build or repair your credit, it’s important to understand how this type of credit can make or break your credit score. Let’s take a closer look at how an installment loan can affect your credit score.
1. Applying for a loan can easily damage your credit score
When you apply for an installment loan, some lenders conduct a rigorous investigation, which means they take a formal look at your creditworthiness and history. These hard queries hurt your score a bit. However, as you build your score over time, hard requests do less damage each time you get one. Also, tough inquiries fall off your credit report after two years. If they drop, your credit score can go up.
Although it can be difficult to find installment loans without a credit check, there are many lenders who only make a gentle request during the approval process. Soft credit checks do not affect your credit score and are only visible to you.
4. Timely payments can improve your score
Two of the most important factors used to calculate your score are your payment history and the length of your credit history. Because of this, making payments on time each month can go a long way toward improving your score. Likewise, missing payments can affect your score, so try to make all your payments on time.
2. Adding the loan to your loan mix can improve your score
Your credit mix is an important factor in determining your creditworthiness. It examines how many credit accounts you have open and how varied they are. By taking out an installment loan, you expand the number and variety of your credit accounts, which can boost your score relatively quickly.
3. Paying off credit cards with the loan can improve your score
Credit utilization is another factor used to calculate your credit score. It measures how much you borrow from your revolving credit accounts (credit cards and lines of credit) relative to your credit limits on those accounts. So if you get an installment loan to pay off your credit card balances, you could improve your score by reducing your credit utilization.
The final result
Installment loans can affect your credit score in many ways. The initial hard request will slightly hurt your score, but you can easily undo that damage with timely monthly payments. Also, adding the loan to your credit mix and using it to reduce credit card debt could provide another credit boost. Overall, to take advantage of installment loans, make sure you only borrow as much as you can afford to pay back.
Note: The information provided in this article is for informational purposes only. Ask your financial advisor about your financial situation.
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How an installment loan can affect your creditworthiness