Bad credit leads to higher interest rates and higher finance charges that reduce your chances of saving money. If you have a bad credit score and have taken a loan, you can use bad credit installment loans to improve your credit score. This article discusses how you can move from bad to excellent credit with installment loans.
What Are Installment Loans?
Also known as a credit-builder loan, an installment loan refers to a type of loan in which you borrow a certain amount of money to settle all debts. After settling all debts, you are left with repayment of the installment loan. Since you repay the loan over a fixed number of payments, it is called an installment loan. In some loans, the payment amount remains fixed for the entire period of repayment unless you opt for a variable rate of interest.
How Can Installment Loans Improve Your Credit Score
An installment loan can help improve your credit profile if you have bad/thin credit. The installment can also help you build a credit profile if you don’t have one. Here are some ways in which bad credit installment loans can improve your credit score:
Pay Installments on Time
Installments simplify debt repayment. When you take an installment loan and repay all debts, you are left with only the repayment of one debt. When you pay the installments on time, the lender reports your financial activity to the credit bureaus, which leads to the improvement of your credit score. Monthly installments are a big influence on your credit score. On-time monthly payment of the installments makes a huge improvement in your credit score. You need to ensure you are never more than 30 days late on installment payment as, otherwise, it will severely affect your credit score and push it in the red.
Reduce Credit-utilization Rate
Your credit utilization rate decreases when you opt for an installment loan to repay multiple debts, which may include multiple credit card repayments. Do you know the percentage of your borrowing limit utilized by you affects your credit score? The higher the utilization score you have, the more it will affect your credit score. The credit utilization rate of 30% or more affects your credit score negatively. Installment loans reduce your multiple credit card debts, which also lower your credit utilization ratio for that particular credit card.
The result is your credit score jumps towards green when you repay multiple credit card debts. However, you need to avoid applying for a new credit card or adding new credit card debt if you want to move from a bad to a good credit score.
Debt Consolidation
Installment loans work on the principle of debt consolidation, where multiple debts are consolidated into one. This makes repayment easier as you have to focus on only one monthly repayment. Installment loans can help you get rid of high-interest debts, which also make repayment easier.
Bad credit can make you jobless or homeless in some cases. Hence, you need to take immediate steps to pull your credit score out of the red. Bad credit installment loans can help fix your credit score and end your financial woes.