How to Use a Personal Loan to Build Credit | LendingTree (2024)

FAQs

Is a personal loan a good way to build credit? ›

Yes, getting a personal loan can build credit, but only if the lender reports your payments to the credit bureaus. You'll borrow a fixed amount of money from a lender, which you'll then pay back in intervals over the course of the loan term, with interest.

Because payment history is an important factor in calculating credit scores, credit-builder loans can be used to build credit. Banks, credit unions, online lenders and financial technology companies may offer credit-builder loans. Good credit scores aren't required to open a credit-builder loan.

This allows them to look at your history from the past seven years and see whether you've typically made payments on time. For a $30,000 loan, you'll typically need a credit score above 600 just to qualify or above 700 to get a competitive rate.

Paying on time every month, keeping your credit utilization low and having a mix of different credit can help build your scores over time. If you have little or no credit history, it may take three to six months of credit activity to get your first credit scores.

A personal loan will cause a slight hit to your credit score in the short term, but making on-time payments will bring it back up and can help improve your credit in the long run. A personal loan calculator can help determine the loan repayment term that's right for you.

When you apply for a personal loan, lenders will run a hard credit check to have access to your credit report and history. Hard credit checks temporarily lower your credit score by as much as 10 points. But if you have excellent credit, applying for a loan will most likely make your score drop by five points or less.

Pay on time, every time

One of the fastest ways to build good credit is by paying your bills on time. Creditors like to see a solid track record of responsibility. If you miss a payment – even just one – it will stay on your credit report for seven years. Make paying bills on time your priority.

A personal loan provides you with the money upfront, allowing you to use it immediately. A credit builder loan is specifically designed to help you establish or rebuild your credit history. Once you receive the money, you can use it for whatever you want. However, it's not a good choice if you need cash fast.

There are many different kinds of loans you can use to build credit. You can use a revolving credit line like a credit card or installment loans, such as auto loans, mortgage loans, student loans, personal loans, credit-builder loans and more.

What credit score do I need for a $70000 loan? ›

Typically, you need a good credit score (670 or better) to qualify for a $70,000 personal loan. $70,000 is a lot of money, and since the loan is unsecured, your lender needs assurance through a positive credit history.

You can borrow from $1,000 to $100,000 or more with a 700 credit score. The exact amount of money you will get depends on other factors besides your credit score, such as your income, your employment status, the type of loan you get, and even the lender.

Though they're a form of debt, personal loans can also serve as a tool to build credit. This is because they can contribute to your payment history and credit mix, as well as lower your credit utilization ratio. Collectively, these three factors account for 75 percent of your credit score.

The answer here is, surprisingly, yes. In certain situations, paying off a personal loan early can affect your credit – in both good and bad ways. That said, the possible negative effect on your credit typically isn't enough to negate the benefits of an early payoff.

Generally, significant improvement can happen within a few months with dedicated effort (like paying down debt). Reaching 700 itself might take longer (12-24 months), depending on your credit history. Consistency is key!

In short, taking a personal loan can actually help you improve 90% of the factors used by credit bureaus for calculating your credit score.

You can get a personal loan with an 700 credit score, but not every lender may approve you. Some lenders require scores well into the 700s for consideration. However, depending on the lender, you may get a personal loan with rather competitive terms.

“A personal loan is a good choice if you have room in your budget for a fixed payment for two to seven years and a steady, reliable income. It's a great tool for consolidating credit card debt, as long as you don't charge the cards up later.

If you're making all your repayments on time, having a variety shows lenders that you can manage different types of credit accounts well. A personal loan could add to your mix of credit accounts and potentially boost your score, if you always make your payments on time.