How to Build Credit With Loans

A good credit score is an important aspect of personal finance and can help you access various financial products, such as a credit card or a mortgage. Likewise, if you have a low credit score, it can be challenging to get approved for financing. Some loan products, however, can actually help you improve your credit score and increase your options. 

How do loans help improve your credit score?

Your credit score is a three-digit number that represents your creditworthiness based on your credit history. It is calculated based on various factors such as payment history, credit utilization, length of credit history, types of credit accounts, and new credit inquiries. When you use loans, it can positively impact your credit score by:

1. Building a credit history: If you don’t have a credit history, it can be challenging to get approval for financial products. Using loans, such as personal loans or credit builder loans, can help you establish a credit history and demonstrate your ability to make payments on time.
2. Improving payment history: Your payment history is one of the most important factors that impact your credit score. Making payments on time and in full can help you build a positive payment history and improve your credit score.
3. Reducing credit utilization: Credit utilization refers to the amount of credit you use compared to the amount of credit available to you. High credit utilization can negatively impact your credit score. By taking out a loan, you can reduce your credit utilization and improve your credit score.

Different types of loans to improve your credit score

1. Personal loans: Personal loans are unsecured loans that can be used for a variety of purposes, including credit score improvement. They come with a fixed interest rate and repayment term, making them a predictable and manageable form of credit.
2. Credit builder loans: Credit builder loans are specifically designed to help individuals build their credit history. They work by providing you with a small loan that is secured in a savings account, which you then repay over a set period of time. As you make payments on time, you build a positive credit history, which can improve your credit score.  When the loan is paid off, you can receive the loan proceeds.
3. Secured loans: Secured loans are loans that are secured against an asset, such as a car. They are less risky for lenders, making them easier to obtain than unsecured loans. By making payments on time and in full, you can demonstrate your ability to manage debt and improve your credit score.

Keep an eye on your credit score and credit report to see the impact of your loan on your credit history. Check the information on your credit report periodically to make sure it’s accurate since mistakes on a credit report can bring down your credit score. Dovly is an automated credit improvement engine that can help you track and manage your credit. Try it risk-free with our free membership tier.