Do Installment Loans Build Credit? Here Is What You Need To Know
What Are Installment Loans?
If you’ve ever had a medical loan, car loan, mortgage, or another type of personal lending product that has fixed monthly payments, chances are good that you already have an installment loan on your credit report.
- This type of financial product provides you with a lump sum which you pay back each month until the full amount is settled.
- This is different from revolving credit - including credit cards - where you borrow funds as you need them and need only pay a minimum monthly amount.
- These loans will usually come with a fixed interest rate and it’s not unusual for your monthly payments to be identical during the term of your loan. This makes it easier to budget for the full monthly cost of your debt and pay it down in full.
How They Impact Your Credit
Like most lending products, installment loans affect your credit score as long as your lender reports your payment activity to the three main credit bureaus: Experian, Equifax, and TransUnion.
Some types of loans aren’t reported – these include payday loans. So it’s always a good idea to check with your loan provider and make sure that they share your payment activity with at least one of the three main bureaus.
- Every time you make a payment before the due date, this positive behavior will be reported to at least one credit bureau, helping your credit score gradually increase as a result.
- If you don’t currently have a loan on your credit report, you could improve your credit mix by applying for one.
- You’ll want to be careful about applying for too much new credit at once because this can cause your score to drop.
Is It A Good Idea To Take An Installment Loan For Credit Building?
A well-managed loan can certainly help improve your FICO score – as long as you can afford the repayments.
- It’s important to note that every loan comes with interest expenses and fees. You’ll want to weigh these costs against the benefit of increasing your credit score.
- Credit builder loans are lending products specifically designed for customers with thin credit reports and histories. Instead of borrowing a lump sum, your monthly payments will accumulate just like they would in a savings account. You’ll receive the total amount back at the end of the loan term.
- This may be a good solution for young people who wish to increase their credit score while building up a savings nestegg.
Factors That Make Up Your FICO Credit Score
FICO (The Fair Isaac Corporation) is a financial organization tasked with calculating credit scores for individuals and businesses in the United States. The following factors contribute to their scoring calculation:
- Payment history (35%): Timely payments will improve your score while late payments will cause it to drop.
- Amounts owed (30%): You’ll want to keep your credit card balances below 30% percent of your total borrowing limit.
- Length of credit history (15%): The longer your accounts are open and in good standing, the better your score.
- Types of credit used (10%): Your credit mix may help to raise your FICO score.
- New credit applications (10%): Too many recent credit applications may cause your score to drop.