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How Can a Personal Loan Affect My Credit Score

Life is full of surprises, many of which affect your financial status. An accident may have brought you an unexpected medical expense, for instance, or your plumbing system suddenly needs an overhaul—bigger than your child’s tuition fees. You may have also been forced to move out of your home, requiring you to have more cash on hand. For many, such instances can be disheartening, especially considering the amount of money involved.

In such circumstances, taking on more debt to pay for your needs may sound counterintuitive, if not downright imprudent. However, experts postulate that a personal loan can allow you to cope well, especially if you require cash. You’ll be able to borrow what you need, and at the same time, build your credit.

As with all loans, however, your credit score can either be affected positively or negatively, which is why it’s important to first assess the risks and benefits involved. To learn more about the impacts of personal loans, we’ve curated this guide for you:

The Good Side of Personal Loans: Boosting Your Credit

With the help of a personal loan, you’ll be able to build a better credit mix. Having a variety of credit types boosts your score in unprecedented ways. Borrowing a personal loan will be an investment, especially since you’ll be paying in installments. Paying it off consistently and on time signals a boost, one that can enhance your overall credit score.

You’ll also have the chance to build a good payment history, as well as reduce your credit utilization ratio. This means that your available revolving credit will not be affected, as you’ll essentially be working in an installment repayment plan instead—one that isn’t regarded as a part of the credit utilization ratio.

The Downside of Personal Loans: How Your Credit Can Be Negatively Affected

You may be more than ready to fill out the personal loan application, but it’s important to remember that there are downsides to every loan type—no matter how promising. For one, a personal loan can get you in deeper debt.

Taking out a personal loan essentially means taking in more debt, which can be costly if you do not have the means to manage your finances properly. Using the loan to pay off your higher-interest debts can be more than possible, but getting out of the cycle will only be possible if you choose to get out of the habits that caused you to spiral.

Such actions could mean cutting off the credit card for good or looking for more ways to lessen your expenses. A personal loan has been designed to help those who need it, but it must be used with the utmost prudence and responsibility.

The Bottom Line

From everything gathered, we can deduce that personal loans are incredibly powerful and useful tools. They can help improve your credit score in more ways than one, as they can effectively reduce your incurred debt. They can also cover unexpected expenses, but it’s important to remain vigilant. You’ll need to carefully weigh out the benefits and disadvantages of the loan, especially when it comes to your lifestyle and financial habits.

For personal loans in Birmingham, AL, we’ve got you covered. First Finance has been serving clients since 1998, making lending and customer service at the heart of what we do. Allow our experienced team to help you—reach out today.

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