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 Rocket Loans 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. Rocket Loans allows for people to get unsecured personal loans for anywhere between $2,000–$45,000 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.
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, Rocket Loans 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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