You may hesitate to get a credit card because you’ve heard the horror stories about people racking up thousands of dollars in debt. Or you may have already damaged your credit through less-than-responsible credit card use. You might just prefer to conduct all your business in cash.
Whatever the reason, you don’t have a credit card and you don’t want one. But you do want to buy a house someday, and you realize that you need to establish good credit. Personal loans provide the ideal vehicle for establishing credit without running the risk of maxing out on high-interest credit card debt.
Finance Major Purchases or Reduce Debt
Have you always wanted to visit your family’s ancestral homeland? Visits to exotic locations like Europe, the Far East and Africa can be extremely expensive.A personal loan may be just the ticket – pun intended – to send you packing on a trip of a lifetime. Financing such a trip with a personal loan can be a savvy strategy. Personal loans generally carry lower interest rates than credit cards.
At the same time, an unsecured personal loan carries less risk than a home equity loan or another type of secured loan. While you would naturally never accept a loan with the intention of failing to pay it back, sometimes things happen. You may become seriously ill or lose your job. Many banks and other lenders of personal loans will allow you to skip one or more payments or otherwise renegotiate the terms of your loan short-term, allowing you to get back on track without risking your home, car or other possessions.
Build Financial Discipline
Credit cards and lines of credit are types of revolving credit. With revolving credit, once you pay down the balance, your credit limit is restored. If you only make minimum payments on revolving debt, it’s possible that you may be making payments years later, even if you always make payments on time. By contrast, Personal loans represent a type of installment debt. Installment debt gets its name from the fact that you make payments toward your financial obligation over time. At the end of your repayment period, you will have paid off the loan in full, along with interest. You will also have developed experience – and hopefully financial discipline – associated with establishing and maintaining a regular repayment schedule.
Improve Credit Scores
According to the MyFICO website, your payment history makes up a whopping 35 percent of your FICO score. Making on-time payments on your personal loan can improve your overall credit profile along with your credit score. Seek out personal loans that report your payment history to all three major credit unions: Experian, Equifax and TransUnion.That way your on-time payments have the best chance of being incorporated into your credit profile as well as your FICO score.
A Brighter Credit Future
Credit cards are convenient, and handling credit cards wisely is a great way to build good credit. But credit cards are not the only means of improving your credit profile. Wisely using and repaying a personal loan now can boost your FICO score and make it more likely that you will qualify for a car loan or a mortgage in the future.
Audrey Henderson is a Chicagoland-based writer and researcher. She holds advanced degrees in sociology and law from Northwestern University. Her writing specialties are sustainable development in the built environment, policy related to arts and popular culture, socially and ecologically responsible travel, civic tech and personal finance.