Can an Installment Loan Help My Credit Score?

When analyzing installment loans and poor credit scores, a lot of people do not really understand how an installment loan can help their credit rating. According to the team at ARCCT Loans most people do not realize that their credit portfolio needs to be diversified in order to increase their credit score. The first question we will address is; what is an installment loan?

Basically, an installment loan is a loan that has a fixed balance that you’re making installment payments against that loan. So great examples are auto loans and home mortgages, that’s where your balance doesn’t change. Well, it is changing because you’re paying off the balance and so the balance is getting low your principal balance is changing but it doesn’t revolve. So let’s talk about revolving credit and how that’s different. Revolving credit means your balance is changing from month to month and it can actually roll over, so this is a revolving type credit situation you’re going to be looking at credit cards. So that’s the basic difference revolving credit cards, installment credit, auto loans home loans those types of loans.

This type of financing can be an excellent choice when you need fast money and want to have a monthly payment. These installment loans for bad credit scores are a very flexible option for people that are on a tight budget. Generally, this type of financing can include a loan for a small amount or even much larger loans and payment terms can range from a few weeks to several years. Of course, the length of the term will depend on how much money you borrow. Another aspect of a good installment loan is that they do not carry any penalties if you decide to pay it off early. Always ask your lender if there are any pre-payment penalties.

So why do Installment Loans Really Matter?

Well the FICO credit score system really likes having a mixture of credit. It likes you to have both installment credit and revolving credit because the more credit history you have the more it can assess your risk. Having that mixture is really helpful to the credit score system. What’s even better is if you actually have an installment loan that’s been paid off. For example, if you have got a car loan that you had from years ago that you paid off and that’s on my credit report. It shows that you’ve got this great history that I had a four year loan and then I paid it off in full.

How to Use Your Installment Loan Wisely

If you’re looking to buy an automobile right now one thing you may want to consider getting a shorter term on that loan. If you can afford it get a 3 year loan term instead of a 4 year term. Why? Your credit score will thank you a year earlier and that you’ll have that extra year where you’ll have that history of a fully paid off auto loan, paid in full and paid on time. That will really help your credit score. It’s not going to help your credit score right away, but this is a down the long-term strategy that makes sense.

Be Knowledgeable About Your Agreement

As with any type of financing make sure you understand all the terms. If you have questions, don’t feel pressured to just sign papers. Slow down and ask your loan officer to explain anything about the installment loan that you are not sure about. More information about how these loans work can be found here and you can also find more information on the ARCCT website.

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