How to Use a Personal Loan to Build Credit
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Last updated 03/15/2024 by
Allison MartinDoes your credit score need a boost? Whether it’s to qualify for a new home or car, getting a personal loan can help get you build your credit.
How can a personal loan improve your credit? Personal loans allow you to build positive payment history, which accounts for 35 percent of your FICO score, by paying a set amount each month for the duration of the loan term. Furthermore, personal loans can improve your credit mix and consolidate your debt.
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Using a personal loan to build credit
It’s fairly simple to find the best personal loans that will boost your credit. Here’s how to pull it off:
1. Look for small credit-builder loans
Some financial institutions and online lenders offer credit-builder loans. These loans are typically for small amounts but payment activity is reported to the credit bureaus. This allows you to have a shot at rebuilding your credit without getting in over your head. Secured loans, which require a security deposit that will be used as collateral if you default, are also a viable option.
SuperMoney’s personal loan comparison tool is a good place to start. Credit unions and community banks often offer credit builder loans as a service to their clients. If you don’t like the idea of getting into debt to improve your credit, consider opening an account with Self Lender. Self Lender is a special savings account that reports your deposits to the credit bureaus as loan payments.
2. Explore credit consolidation loans
Using a personal loan to consolidate credit card debt lowers your credit utilization ratio. Your credit utilization ratio is based on how much credit card debt you have relative to your available credit. However, you must keep your credit card accounts open after paying them off to derive the credit score benefits.
To illustrate, let’s assume you have the following credit cards:
| Current Balance | Minimum Payment | Credit Limit | APR | Time to Payoff (months) | Total Interest Paid |
| $250 | $15 | $500 | 15% | 19 months (1 year and 7 months) | $32 |
| $500 | $25 | $1,000 | 17% | 24 months (2 years) | $92 |
| $1,250 | $35 | $2,000 | 19% | 54 months (4 years and 6 months) | $607 |
If you take out a $2,000 personal loan with a two-year repayment term and interest rate of 12.9 percent, you’ll pay $94.99 per month and approximately $280 in interest over the life of the loan. Plus, you’d lower your credit utilization on revolving accounts from 57% to zero.
However, if you continue to make the minimum payments, it will take two years and 11 months to pay off the balances. That’s a difference of almost one year! Furthermore, you’d pay a total of $573 in interest on the credit cards (assuming you don’t make any more purchases).
If you’re considering debt consolidation, check out SuperMoney’s comparison tool to find the lenders with the best rates and terms.
3. Set up automatic payments
This ensures loan payments are made on or before the due date each month. Otherwise, you’ll incur late fees. And if the delinquency reaches 30 days, your credit score could drop by up to 110 points (source).
4. Read the fine print
Pay close attention to the section on fees and penalties. Seek clarity for any components you don’t understand. For example, you may be assessed a loan origination fee to process the application or prepayment penalty if you settle the balance early. Depending on the amount of the loan, these values could be hefty, and the costs of taking out the loan could outweigh the benefits.
5. Get a secured credit card
If you’re having trouble qualifying for a personal loan, get a secured credit card. Although they require a security deposit, secured credit cards like the USAA Bank Secured American Express® or the Capital One Secured Mastercard, are a great tool for rebuilding credit and building rapport with a bank.
Getting a secured credit card is as simple as:
- Shopping around for the best options. Visit local credit unions and community banks as they tend to have lower rates.
- Using SuperMoney’s personal credit cards comparison tool to explore terms and rates.
- Submitting an application and making the minimum deposit (or higher) to open the account.
Once the account is active, make timely payments and keep the balance low to give your credit a boost. To get started, use SuperMoney’s credit card comparison tool to help you find the best secured credit cards on the market.
Getting Started with a Personal Loan
There are scores of personal loan products available from brick-and-mortar financial institutions, private entities, and online lenders. If you don’t actually need the cash, consider opening an account with Self Lender. Their credit building loan offers the credit benefits of a loan without having to get into debt.
If you’re unsure of where to start, use SuperMoney’s personal loan comparison tool to explore your options. SuperMoney also offers free reviews and consumer comments to help you compile a list of loan products that will best suit your needs.
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Allison Martin is an accomplished finance writer who has written for publications including The Wall Street Journal, MoneyTalksNews, The Simple Dollar, and Credit.com. Her work has been featured on Fox Business, Yahoo! Finance, MSN Money, and ABC News. She enjoys writing about personal development, entrepreneurship, personal finance and is a Certified Financial Education Instructor (CFEI).
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