How To Use a Personal Loan to Build Credit
- Making full, on-time payments on a personal loan can build your credit score over time.
- If you already have a personal loan, making regular payments is a reliable way to improve your credit — but it’s not the only way to do so.
- If you just want to build credit but don’t need to borrow money, consider getting a credit-builder loan or credit card that you can pay off.
Personal loans can be a useful tool in building or rebuilding your credit, but just having one isn’t enough. To improve your score, you’ll need to make regular, on-time payments every month, and it might take some time to see improvements.
Here’s what you need to know about using a loan to build credit over time.
Does getting a loan build credit?
Yes, getting a personal loan can build credit when:
- The lender reports your payments to the credit bureaus, and
- You make on-time payments in full every month.
Here’s why. Your payment history is worth 35% of your FICO Score. Missing payments can tank your score, but on-time payments can boost it — particularly if you’re starting with poor or fair credit.
But you’ll only see a score boost for loan accounts that go on your credit reports, which are managed by the credit bureaus. Many loan companies report to all three, but you’ll need to check to see whether that’s true for your lender. (You can Google it or ask your lender directly.)
If your lender only reports to some credit bureaus, you may only see improvements on certain credit scores and not others. Learn more about your different credit scores and how credit reports work.
Clueless about your credit?
Check your credit score for free with LendingTree Spring. You’ll get personalized recommendations on how to boost your score, and you can use Spring to track your score over time.
How to use a personal loan to build credit
You can use a personal loan to demonstrate your ability to manage debt. Personal loans can help you:
- Build up a record of on-time payments. Your payment history is the most important factor that affects your credit score and makes up 35% of your FICO Score. Making payments on time and in full can improve your score and create a strong credit history.
- Contribute to your credit history over time. Opening a personal loan account may initially lower your average account age, but can lengthen your credit history in the long run if you maintain the loan. The length of your credit history makes up 15% of your FICO Score.
- Improve your credit mix. Having multiple types of credit accounts can give your score a little boost because your credit mix is worth 10% of your FICO Score. Lenders like to see that you can handle multiple types of credit, like revolving credit (e.g., credit cards) and installment credit (e.g., personal or auto loans).
Practical tips to use any loan to build credit
- Make sure your lender reports payments to the credit bureaus. Only accounts that are reported to the bureaus will affect your credit score. If possible, choose a lender that reports to multiple bureaus. Not sure if yours will? Google it or ask the lender directly to confirm.
- Set up automatic payments or calendar reminders. Even one missed payment can cause your credit score to drop. Consider using autopay for your loans and credit cards if you know you’ll have the money to cover your monthly payment in your bank account. If not, set a reminder in your phone to make your loan payment a day or two before it’s due.
- Call your lender before you fall behind. Some lenders offer hardship programs that allow you to temporarily postpone or lower your monthly payments without affecting your credit. But to protect your credit score, it’s up to you to ask about these programs before you miss a payment.
- Consider refinancing in the future. If rates are down or your credit score is up, see if refinancing your personal loan will save you money. Personal loan rates are fixed — you’ll have the same APR and monthly payment for the term of your loan. But refinancing can help you get lower rates, and you can use any extra money to keep up with your other financial obligations.
What payment habits or strategies have the biggest impact on rebuilding credit with a loan?
Taking on debt to rebuild credit is a valid strategy, but you must be absolutely certain that you can pay on time, every time. Consider signing up for autopay. It can feel a little uncomfortable if you aren’t used to giving up control. But autopay will make it less likely that a payment will fall through the cracks. Some lenders give an autopay discount, too.
Drawbacks of using a personal loan to build credit
Using a personal loan to rebuild credit isn’t the right solution for everyone. Consider the potential downsides before you make a commitment.
- Personal loans can be expensive. If you have bad credit or very little experience with credit, you’ll get a higher annual percentage rate (APR) than someone with good credit and a long credit history. There are cheaper ways to improve your credit if you don’t need to borrow money.
- Late payments can hurt your credit. If you’re not able to keep up with payments, it can cause significant damage to your score and even make it difficult to take out future loans.
- Credit bureau reporting isn’t universal. Before you sign with a lender, make sure your lender reports to at least one of the major credit bureaus. The bureaus record your activity on your credit reports, which then informs your credit score. If a lender doesn’t report your on-time payments, it won’t improve your credit score.
- Hard credit pulls can hurt your score. When you take out a personal loan, your lender will run a hard credit pull to check your credit background. This will cause your credit score to drop, but the impact is typically small and temporary.
Other ways to build credit
You don’t need a personal loan to build credit. Consider these LendingTree expert-approved options if you want to build credit without borrowing money.
- Credit-builder loans are a unique type of installment loan designed to help people with bad or no credit build credit over time with on-time payments. Instead of giving you money upfront, your lender will keep your credit-builder loan payments in a special savings account that you can access once you pay off your loan.
- Credit cards differ from personal loans because you’ll only pay interest if you carry a balance. Paying off your credit card bill in full every month can help you build credit without spending money on interest. If you have bad credit, check out secured credit cards or become an authorized user on a friend or family member’s account.
- Report regular bills to the credit bureaus instead of taking out a loan. For instance, reporting rent payments to the credit bureaus can help boost your credit score. You can also report your utility bills. Learn more about using your bills to build credit.
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