A consumer credit, known as an installment loan, is repaid in equal portions, often every month, and for a fixed amount of time. In most cases, unless you have been offered an introductory financing package with a 0% annual percentage rate (APR), you will be required to pay interest to the lender in return for the ability to pay off the loan over time. The loan may either be secured, backed by a piece of assets that the lender can take away from you if you do not pay, or it can be unsecured. Common installment loans include mortgages, school, personal, and vehicle loans.

Credit cards, on the other hand, belong to the revolving credit category, distinguishing them from installment loans. Instead of an installment credit account, a revolving credit account allows you to borrow money regularly and pay it back over time.

You might get an installment loan for $10,000 and repay it over five years. On the other hand, a credit card would provide you a credit limit or credit line of a certain amount, which you could charge up to as much as you wanted. When you carry a debt from one billing month to the next, you will normally be subject to interest charges on that sum.

What Impact May Take Out An Installment Loan Have On Your Credit?

Credit ratings may be improved via the use of installment loans if:

You pay on time

If you make your payments on time every month and the lender reports your activity to one or more credit agencies, you can use an installment loan to help develop your credit. Your payment history has the greatest impact on your credit score; thus, maintaining a history of making payments on time can assist your credit, but making payments more than 30 days late will drastically impair your score. Your credit might take a serious hit if you let a home or vehicle go into foreclosure or get repossessed.

You have only credit cards now

Your account mix is a consideration but a less important one. If you have credit cards, adding installment debt is a great way to diversify the kinds of credit you have, and it might offer your score a little boost.

Your credit utilization drops

In conclusion, your credit score could improve if, for example, you take out a loan with installment payments to pay off your credit cards. The ratio that indicates how much of your available credit you use might be lowered by transferring credit card debt to an installment loan. Utilization is credit jargon meaning the ratio of your current debt to the total credit available. Your credit score considers this rather heavily. By transferring your debt to a personal loan with installment payments, you may immediately lower your usage rate on each card and overall use rate.

Your credit score may momentarily drop a few points if you apply for any credit product since lenders analyze credit reports on prospective borrowers. These checks are referred to as "hard inquiries," and they leave a trace on your credit record.

Should You Acquire An Installment Loan If Your Only Goal Is To Improve Your Credit Score?

Credit-builder loans are the one exception to the rule that taking out an installment loan is often undesirable solely to improve one's credit score. Their raison d'être, implicit in their company name, is credit acquisition. These installment loans might help build your credit profile even if you have little to no credit or no credit at all.

After receiving approval for a credit-builder loan, the money is placed in a savings account or a certificate of deposit. Your access to the funds will be restricted once you have satisfied the loan terms.

When you make payments on time, you improve your credit history and end up with a great emergency fund by the time the loan is paid off. But missing payments may ruin your credit, and taking out too much budget can burden your finances and make it more likely that you will skip payments.

Using Installment Loans to Improve Credit

It is important to apply for the amount of credit that you need. It is dangerous to take on new debt when you do not have the resources to pay off the old debt, and new credit applications might have a momentary negative impact on your credit score.

On the other hand, if you were already considering applying for an installment loan to finance the purchase of a new vehicle or home or planning to attend college, boosting your credit score might be a useful secondary effect of taking out a loan. Make sure that all of your monthly payments are made on time to make the most of the chance an installment loan gives to improve your credit.