When you have taken out a subprime personal loan or about to, know that it can improve your credit profile. This credit, needless to say, is key to any loan endeavor for lower rates, better terms. How do you go about using your subprime personal loan for credit-building purposes?
When a major expense is looming and it’s too small for a home equity line of credit and too large for a credit card, personal loans are your safe bet. They are loans for up to $35,000 and payable in a few years’ time.
1. Use your subprime personal loan to get rid of high-interest debt.
Essentially, a credit score reflects how you utilize and manage your installment debts and revolving credit lines. Personal loans, like home loans and car loans, belong to installment debts. Meanwhile revolving credit pertains to credit cards.
One of the best ways to use a personal loan is debt consolidation. Target credit cards with high outstanding balance. You not only eliminate those high balances, you also mitigate a growing credit card debt. This frees up your monthly budget for other expenses and savings.
2. Use your subprime personal loan to lower your credit utilization.
Credit cards are used in measuring your credit utilization, which is basically how much credit card debt you carry relative to your available credit limit. While there’s no “ideal credit utilization”, FICO gives 30% weight on credit utilization and notes that a utilization of below 50% is something to aim for.
For example, a credit card with a credit limit of $1,000 should not have charges exceeding $500. That’s just for one card. To determine your utilization across all cards, subtract the outstanding balance of all cards from the total credit limits.
Against this backdrop, paying off some of your credit card balance using your personal loan brings this credit utilization lower. This keeps your credit score healthy and lenders would be glad to see you managing your debt well.
3. Use your subprime personal loan to maintain an on-time payment history.
Personal loans are repaid in fixed monthly payments. That makes it hard for you to miss repaying it or even defaulting if it comes to that. They can also be auto-deducted from your savings account, a convenient way to settle your dues on time.
Paying as scheduled will reflect on your payment history, which takes up 35% of your FICO score. This is the largest component of your credit score, by the way.
From a lender’s point of view, if you’ve been good at keeping or meeting your current and past debt obligations, you are reliable enough to be trusted with a loan.
You will likely see an improvement in your credit score while or after paying off your personal loan. You may also apply for a refinance to get a lower rate. This goes to show that subprime personal loans can bring about a good change in your future credit status.