Grace Enfield, Content Writer
@grace_enfield
Yes, installment loans help your credit score if you pay the monthly bills on time, as lenders generally report account information to at least one of the three major credit bureaus each month. Every month you make your installment loans loan payment on time, your lender will report positive information to the bureaus about your account, which helps your credit score. In fact, payment history is the most important contributor to your credit score, making up as much as 40% of your final score.
Keep in mind that applying for a installment loans triggers a hard inquiry into your credit history. This typically results in an initial drop in your credit score, but just by a handful of points. Making on-time payments faithfully will usually correct this dip within a few months.
You can use WalletHub’s free credit score tool to check your current credit score and try our free credit score simulator to predict the effect that installment loans may have on your credit.
Other Ways installment Loans Can Impact Your Credit
- Taking on more debt raises your debt-to-income ratio. If you’re burying yourself in debt, your credit score is likely to decrease. A high debt-to-income ratio is a red flag to lenders because adding more debt when you’re already overwhelmed could cause you to default on your loan. It could also indicate that you’re desperate to borrow just to make ends meet.
- Loans count toward the length of your credit history. The length of your credit history makes up around 15% of your credit score and may include both open accounts and closed accounts that are still listed on your credit report, depending on the credit score model.
- Applying too often can be a problem. Opening too many new loans in too short a time can lower your credit score. It’s best to only take out one or two loans or credit accounts per year for this reason.
- Having a variety of loan types at once can be helpful. If you already have a credit card, adding a installment loans that you can afford can also help improve your credit score by diversifying your credit mix. As opposed to a credit card, which is a type of revolving credit, installment loans are distributed in one lump sum and repaid over a preset time period. This mix of credit types demonstrates to creditors that you’re able to handle multiple types of debt at the same time.
To learn more, check out WalletHub’s guide to improving your credit score.
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