Man and woman holding credit card

If you’re looking to improve your credit by paying down debt or if you’re just beginning to build up your credit, a personal loan could be a great direction to go.

In this post, we’ll go over the benefits of a personal loan to both build credit as well as pay off debt. Our friends over at RocketLoans can help you go over your options and potentially secure funding the same day.

Personal Loans for Building Credit

If you’re new to credit, one of the things that’s important when you’re first starting out is to build it up. There are many ways to do this, including getting a credit card that’s secured by your own funds. You just pay it off every month and if you close the account, you get your money back.

This is a great start, and after 6–12 months, you can apply for a traditional unsecured credit card. However, one of the factors that impacts your credit score is your credit mix. Basically, lenders want to see that you can handle revolving credit like credit cards and also installment loans like car payments or a mortgage.

If you’re just starting out with your credit, you likely won’t be making mortgage payments. You may not necessarily have a car payment either, so how do you get an installment loan?

In this case, a personal loan is a very good option. RocketLoans allows for people to get unsecured personal loans for anywhere between $2,000–$35,000 with 36- or 60-month terms, but different lenders may offer different options.

The nice thing about a personal loan is that you can use the money for whatever you choose while making monthly payments to build up your installment credit.

Debt Consolidation

Americans were carrying over $1 trillion worth of credit card debt as of June 2017. If you’re someone who has been carrying a balance, the interest rate on that money isn’t cheap either.

According to the latest available data, the average rate on a variable interest credit card has begun to hover around 17%. In this case, debt consolidation with a personal loan could work out in your favor. It just depends on the rate you can get and should certainly be considered an option.

If you happen to have home equity, the cheapest possible option in terms of borrowing costs is probably to do a cash-out refinance and use the proceeds to pay off your credit card bills.

On the other hand, not everyone owns a house and even if you do, you may not want to touch your equity, so it becomes time to look at other options.

One advantage of paying off credit card debt with a personal loan rather than rolling it onto another credit card is that you don’t ruin your credit utilization terribly.

Credit utilization is a metric that shows how much of your available credit card balances you’re using. You generally want to keep month-to-month utilization of your credit at right around 30%. Once you get it above 50%, it can really lower your score.

By taking out a personal loan, you avoid putting a large balance on one card and potentially making a credit mistake.

If you’re interested in a personal loan, RocketLoans allows you to check your options online without affecting your credit.

Still trying to decide which option is right for you? If you have any questions, you can leave them for us in the comments below.

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This Post Has 22 Comments

  1. Dear Kevin,
    I started my own small business 2 years ago. I was paying myself as an hourly employee reporting wages to the state as an employer. Then we went through a slow period where I could not pay myself from April through January. With no income, my household expenses loaded my credit cards with thousands in monthly expenses, which I would now like to consolidate in some way with my home’s equity or a personal loan. I am now taking money weekly from my business, but not as a wage. For now, it is like a distribution of profits, or a dividend. So my question to you is: what kind of documentation can be used to prove this personal income to a lender? Is there a certain federal form lenders need to see in lieu of pay stubs or W-2’s since I don’t have those now? Or would a statement from my company’s accounting software suffice? Thanks, Kristen

    1. Hi Kristen:

      Every situation is different, and we use lots of different documentation depending on what you have. The article I’m going to give you is specific to if you were to use your mortgage to do this, but our friends over at RocketLoans would likely need some of the same documentation to help you with a personal loan if you chose to go that route. I’m also going to recommend you speak with one of our Home Loan Experts about their situation at (888) 980-6716. I hope this helped somewhat.

      Thanks,
      Kevin Graham

  2. I filed for a chapter 7 bankruptcy. How does it effect my credit and for how long? How can I build my credit worthiness back up and how long would that take?

    1. Hi Roque:

      A chapter 7 bankruptcy will remain on your credit record for up to 10 years. When you file, it will likely significantly lower your score, but this will go back up over time if you follow good practices like paying your bills on time and maintaining a low credit utilization. You won’t be able to apply for a mortgage until at least a year after the bankruptcy is discharged or dismissed. You would have more options after two years. You may have to follow certain policies depending on the lender and type of loan you’re trying to get to show that you reestablished your credit. This overview has been very general, but there’s more information on how a bankruptcy affects your mortgage process.

  3. My question is how do I get the three credit agency’s to remove things from my credit report that are 20 yrs old and no longer valid. If they were removed my score would improve dramatically.

    1. Hi Catherine:

      If they’re 20 years old, there would be a time frame during which most negative things drop off. In most cases, it seven years and 10 years at the most. I would file a dispute with each of the bureaus and go from there. You can do it online.

      Thanks,
      Kevin

  4. Wish this personal loan can qualify me to have. to pay all my cedit cards debt.it would be appreciated it very much and I’m hoping it will be.and hope god give you more Blessing’s to all you’ve help and i thank you so very much.

    1. Hi Jaye Ann:

      I can’t promise anything and we would definitely want to make sure you qualify for the loan in order to make sure you would be in the best financial position possible, but you can certainly check out your options through RocketLoans. It doesn’t require a hard credit pull to do this. Hope this helps!

      Thanks,
      Kevin

  5. I have an installment loan with a finance company. I am paying a interest of 25% and have a litle more than 2 years left to pay on it with a monthly payment of $ 429.99. Would it be to my advantage of getting a personal loan with lower interest and pay it off ? I also have some credit card debt to . We are making our payments on time but would like to free up more cash each month. Thanks

    1. Hi Blanca:

      The best thing to do is just to visit RocketLoans. They have a ton of information over on their site about how personal loans work and what you can expect. You also have the ability to look into your options without affecting your credit score.

      Thanks,
      Kevin Graham

  6. Thinking about a personal loan. Interested in the interest rate as well as monthly payments and term of paying the loan.

  7. I Currently have a mortgage to quicken loans due to a job relocation unfortunately the 1st year and a 1/2 of being here my husband could not find a job this caused us to build-up credit card debt now my credit score has plummeted my value of my home is $335000 I0 $269000 I would like to come solid 8 everything so I just have one more digit payment and I can get rid of all the credit cards but my credit score prevents me from doing that my husband has a great job right now and we should have no problem in the future but the cards are keeping me buried is there a potential with a bed score

    1. Hi Dianna:

      I can’t promise anything because I don’t know what your score is like. What I can tell you is that RocketLoans will let you check your personal loan options without having to do a hard credit pull. It can’t hurt. You could also potentially look at that consolidation with your mortgage. In that case, I would recommend you talked one of our Home Loan Experts at (888) 980-6716. The other thing you can do is check out our friends at QLCredit. You can pull your credit there without affecting your score and get personalized tips and strategies based on your credit report on how to improve. Finally, I’m going to recommend you check out this blog post for possible credit improvement tips. Hope this helps!

      Thanks,
      Kevin Graham

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