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Does a Personal Loan Help Your Credit?

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If your credit score is less-than-perfect, you may be looking for ways to improve your credit score. Will a personal loan help raise your credit? Absolutely -- under the right circumstances. Here, we'll illustrate how a personal loan can help you build an enviable credit score.

There are two main ways a personal loan can strengthen your credit score. First, your lender reports your on-time payments to the credit bureaus, which raises your credit score. Second, you can use a personal loan to pay off credit cards. Once you've paid off your credit cards, you're not close to maxing out those cards, and your score will rise.

Check the lenders on our list of best personal loans to find a loan that will raise your credit score, or keep reading for more information on how personal loans improve your credit score.

Yes: If your payments are reported

Most personal loan companies report your balance and payment activity to all three credit bureaus every month. Negative reports to the bureaus (like when you miss a payment) drag your score down. Positive reports, like on-time payments, improve your credit score. 

If building your credit history is important to you, ask lenders whether they make monthly credit bureau reports before you sign on for a personal loan. A traditional financial institution like a bank or credit union will make monthly credit bureau reports. It's rare to run across a legitimate personal loan lender that does not report your payment activity to the bureaus, but it's always good to double-check.

Yes: If you're paying off other debt

Using a personal loan to pay off credit card debt helps your credit score. This is because your credit score plummets when you're close to your credit card limits. In fact, paying off credit card debt is one of the fastest ways to improve your credit score.

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Getting started with debt consolidation

Paying off your credit cards with a personal loan can help you save money and improve your credit score almost overnight. Not sure where to start? Take a look at our experts' picks for the best debt consolidation loans.

Want the technical details? Here's how it works behind-the-scenes: Lenders look at how close you are to bumping up against your credit limits (using a number known as your credit utilization ratio). This is one of the most important parts of your credit score. (The most important part is paying your bills on time.) When you pay off credit card debt, your credit utilization goes down, and that's what causes the increase in your credit score.

Debt consolidation also saves money

Best of all, getting a personal loan to pay off credit cards can save money. Credit card balances typically carry an interest rate around 18%, if not more. In contrast, the best low-interest personal loans have interest rates as low as 2.5%. Even if you don't qualify for those exact rates, the rate you'll qualify for on a personal loan will almost always be lower than the interest rate you qualify for on a credit card.

Other ways a personal loan can build credit

While regular positive reports to the credit bureaus and debt consolidation are the two primary ways a personal loan can help your credit score, they're not the only ones. Lenders will feel more comfortable lending to you if they see you've recently made a series of on-time payments for a personal loan.

Also, if your bad credit was a result of a jointly held loan, taking out a personal loan in your own name gives you sole control over how it is paid. If a former partner or spouse was reckless about making payments, you can change course and handle your credit the right way. A personal loan can help you take charge of a difficult situation and move toward financial independence in this case.

When the problem is lack of credit

Perhaps you don't have poor credit. Maybe the problem is that you haven't had the time or opportunity to build a credit score yet. That could be for several reasons:

  • You're young, and just starting out
  • You're a recent immigrant to the U.S.
  • You once had a credit file, but since you haven't accessed credit in two years, the file is in a state of limbo

If you're just starting out, here are three ideas to get you started in building a good credit score:

  1. Take out a credit-builder loan.
  2. Take out a secured credit card.
  3. Take out a personal loan with a cosigner.

Whether you're just starting out and need a credit score or you have a credit score in need of TLC, a personal loan can help boost your credit profile.  

Got bad credit and need a personal loan?

We've run the numbers and read through the fine print to find the loan options with competitive rates and low-to-no origination fees. Learn more about our top picks by clicking below.

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