Can getting a loan help build credit?

If you want to build credit, you'll need to use credit.

If you want to build credit, you'll need to use credit. You can get a loan from a bank or other financial institution and pay it back over time, which will help your credit score. But that's not the only way to build a solid credit history. Using a secured credit card responsibly is another good option because it requires less commitment than a long-term loan.

You can also apply for an unsecured personal loan from your local bank or an online lender—just make sure it doesn't come with an exorbitant interest rate. If you're worried about hurting your credit score, ask about a soft inquiry, which won't impact your score the way a hard inquiry does.

You don't need expensive products to build credit.

Don't think that you need to spend lots of money to build credit. You don't need an expensive credit card with a giant limit, and you don't even need a card at all. Whatever tool you use to build credit—be it a loan, secured card or something else—you should only put what you can afford toward the monthly balance.

It's important to keep in mind that building credit is about building trust with your financial institutions. When you prove yourself reliable, these institutions are more willing to give you larger loans, such as for buying a house or car, in the future. Your goal is not only to boost your score but also make sure that this improved score accurately reflects your spending habits and reliability as a borrower.

An installment loan can help you build credit.

Yes, making payments on an installment loan can help you build credit if the lender reports your payment activity to at least one of the three major credit bureaus.

Here’s what you should know about installment loans and how they can help (or hurt) your credit scores.

What is an installment loan?

Installment loans are a type of loan in which borrowers receive a fixed sum of money and then repay it in equal installments over a fixed period of time. Examples include personal loans, mortgages, auto loans and student loans.

Unlike revolving accounts—such as credit cards—installment loans don’t have variable interest rates or spending limits that change with each bill cycle. That means you pay back the same amount every month. And unless your payment is late or missed, you are not charged additional fees for carrying a balance from one billing cycle to the next.

Use a credit card to build credit.

Another way to build credit is by using a credit card. A secured credit card can be a good option for someone new to using credit because it's easier to get one. The downside is that you have to pay a deposit, which can often be refunded once the account closes in good standing.

One of the greatest things about building credit through regular use of a credit card is that it allows you to manage your spending better than with a loan. Credit cards are revolving products, meaning that your balance increases as you spend and decreases as you pay down your balance or make purchases within your available balance (credit limit). When you choose to pay off all or some of your balance at the end of each month—which we strongly recommend—you're not charged interest on the purchases made that month. And if you've chosen not to carry a balance from month-to-month, interest doesn't enter into the picture at all.

Taking out a personal loan can help build your credit, but only if you repay it on time.

Taking out a personal loan can help build your credit, but only if you repay it on time.

  • If you make all of your payments on time, taking out a loan could potentially help boost your credit scores by adding new information to the mix -- and by increasing your overall amount of available credit.
  • But if you miss payments or pay late, it's possible the loan will have a negative effect on your scores.
  • And if you don't repay the loan at all, that could result in even more damage to your scores.

A secured card can also help you build or rebuild your credit score.

In order to help you build credit, secured cards are a great idea because they have many advantages over unsecured ones. It's free to get one, and interest is usually paid back as soon as you pay your bills on time. Also, secured cards come with perks like increased account balances and cash back rewards.

We suggest starting out with a secured card if you want to rebuild your credit history; this option is better than using one of the options below if you want to make new purchases or open new accounts in the future.

Here's what you need to know about building credit with loans

To ensure that the loan does in fact boost your score, it's important to keep the following in mind.

  • Understand the terms and conditions of the loan before you sign. As with any other type of credit agreement, make sure you understand exactly how much money you'll be borrowing and what interest rate you'll be agreeing to pay back. Most loans will also include a required minimum payment as well as a maximum length for repayment.
  • Keep an eye on credit utilisation rates. When opening any new line of credit—including personal loans—it's important to monitor your credit utilisation rate so that it doesn't approach or exceed 30 percent (the general threshold for damaging your score). Credit utilisation rates are based on how much credit you have available versus how much is actually being used at one time—which means that taking out a personal loan can in some cases lower this ratio, provided that you don't take out too much credit at once and continue paying off old balances (which would increase your total amount of debt).
Still looking for a loan?

Loan Options predictive AI can match you with the best loans for using your circumstances, without impacting your credit score. Chat with our team about how you can improve your credit score so you never have to stress about getting the finances you need.

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