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How Do Loans Help Build Credit?

By Grace Kilander
How Do Loans Help Build Credit

Does your credit need some serious work? Taking out a small loan and making timely payments could make a big difference in your credit score. If you’re suffering from substandard credit, lack of credit, or none at all, qualifying for a loan could be a gamechanger. Beware of high-interest loans– finding yourself unable to pay them could do more harm than good.

Finding an affordable loan that can drive your score up is the task at hand, but how do loans help build credit? Read on to find out more. 

Getting a loan to build credit

It might seem counterintuitive to go into debt to build up your credit, but qualifying for an installment loan, using them wisely, and making timely payments will do wonders for your rating. Learn more about other important factors that can impact your credit score–including loans– below. 

35% of FICO is credit history

FICO is a three-digit number based on your credit report and makes up 35% of your overall FICO score. This number helps lenders make a fast determination of the likelihood that you’ll repay a loan you borrow. Your FICO score assists lenders in determining how much you can borrow, how long, and at what interest rates.

Sustaining long term healthy credit history will benefit your account rating. Most creditors recommended keeping your credit utilization under 30%

For example, having a credit card open for 10 years with consistent usage around 30% or less with timely payments. Typically, the lower your utilization rate with your existing credit, the higher the credit score.

Debt-to-income ratio matters

A DTI, or debt-to-income ratio, is when you compare the amount of money you owe each month versus how much you earn. To calculate this number you need to do the following:

  1. Add up your monthly expenses–not including your groceries, utilities, and gas
  2. Divide that number by your gross monthly income (before taxes) 
  3. The number you get–in percentage form–is your DTI. That number tells lenders your potential risk level. 

Some say that up to a 43% DTI is satisfactory because it is the highest ratio a borrower can have and still qualify for a mortgage, but this could be situational and subjective. 

Mix up your credit

Credit mix makes up 10% of your credit score and a good mix of credit indicates your ability to successfully manage different types of credit. Although not having a variety of credit mix won’t make or break whether a lender allows you to borrow, it will help you reach your highest potential credit score. 

It must be noted, this doesn’t mean go out and apply for any and every credit line available. If you do this, not only will hard inquiries lower your credit score and remain on your credit for two years, but lenders might view you as a risky borrower experiencing financial woes. 

Below is the most common type of credit:

  • Revolving credit – Credit cards, retail store cards, gas station cards, and home equity line of credit.
  • Installment accounts – mortgage, auto loan, student loan, and Credit Builder Loans.

Don’t miss a payment!

Some creditors or lenders might offer a 10-day grace period, but a universal rule of thumb is that you should never miss a payment. A 30-day late payment can drop a perfectly good score by up to 110 points! 

Do student loans help build credit?

Yes, student loans are considered installment loans and they can help improve credit if paid on-time. We recommend paying more than the minimum on all installment loans if your budget allows.

12-Month installment credit builder loan

One of the best credit builder loans out there is with a MoneyLion Credit Builder Plus membership. You could qualify for up to $1000 with affordable 12-month terms–and no hard credit inquiry

If you’re struggling to rebuild your credit, a Credit Builder Loan from MoneyLion could easily improve your credit score by up to 60 points in 60 days without a hard credit pull! Get same-day funding and built-in savings account that you can access after repaying the loan. 

For only $19.99/month, Credit Builder Plus members gain access to regular credit monitoring, Instacash advances, and MoneyLion app tools to better balance their budget and overall financial wellness.

Build better credit the MoneyLion way

The first step to changing or improving your score is getting serious about a budget and making savvy moves at the right time. When you become a RoarMoney member with MoneyLion, we help you get your finances back on track with our budgeting tools and modern approach to banking.

If you think you might be late on the bill because you haven’t received your paycheck yet, consider Instacash and get up to $250 instantly with turbo delivery. Download the MoneyLion app today and choose a bank you can depend on!

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Build your credit and save

Join Credit Builder Plus to get a loan up to $1,000, credit monitoring, exclusive rewards, access to 0% APR cash advances, and more. Over half of members raise their credit over 60 points within 60 days!

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