How to Improve Your Credit Score with a Personal Loan

HomeManage MoneyHow to Improve Your Credit Score with a Personal Loan

Want to Score Cash For Free?

  • Survey Junkie: Earn up to $50 per survey with one of the highest-paying survey sites on the web. Join Survey Junkie Now
  • SoFi Money: Earning money for unlocking better features sounds like a dream. But this free banking app really pays you $100 with you switch your direct deposit to SoFi Money. Get SoFi Money.
  • Aspiration: This mobile banking app lets you do everything for free and takes no fees — ever. Better yet, if you join through this link you can get $100 in your new account.

Thinking about taking out credit building loans? Here are some easy steps to follow so you can use personal loans to build credit.

One of the easiest ways to get instant cash is by opting for a personal loan. Unlike other loans, personal loans generally don’t require security or collateral. The documentation and approval processes are also smooth and hassle-free. Moreover, you can use the amount for anything you want – for planning your wedding, for medical purposes, for a vacation, or for renovating your home.

However, defaulting on a loan could adversely affect your credit score. Let’s look at some of the ways how applying for a personal loan can help you improve your credit history.

Personal Loans Can Be Used to Pay High-Interest Rate Loans

When you have a high-interest loan, it could be difficult to repay the amount every month. The two common financing options people opt for are personal loans and credit cards. People generally shy away from taking a personal loan as they are known to come with high rates of interest. However, they are still a cheaper alternative to credit cards.

When you have more than one credit card, you will have to pay a high rate of interest on the outstanding amount of all the cards. Even if you opt for a credit card that comes with a 0% balance transfer plan, you will have to finish paying off the amount during the introductory period. Once the introductory period is over, the interest rate will shoot up to a two-digit figure.

Want Free Money?

  • Aspiration: Want to get spotted a $150 for free? Simply sign up for Aspiration, and the free banking app will give you cash for free, you just relax while it gives you $150 just for opening a new debit card. There’s no catch. This bank account is legit and only takes two minutes to sign up for an account.

When you use the personal loan amount to finance a high-interest loan, you not only reduce the burden on your overall finances but also improve your credit score immensely. Due to competition from fellow banks, you will come across some banks offering personal loans at attractive rates. Generally, the banks with which you have an account already will offer loans at great rates. You can some of the best personal loan lenders below:

CompanyLoan AmountAPR
sofisofitrustpilotUp to $100,0005.99% - 16.19%


best personal loansbest personal loans$1,000 to $100,0005.99% to 35.99%


zippyloanbest personal loans$100 to $15,0005.99% - 35.99%


best personal loansbest personal loans$1,000 to $35,0007.99% - 35.99%


Can Be Used to Consolidate Debt

One of the common financial problems most people face is accumulating different debts and not being able to pay them off. Even if you have more than one credit card, it will be difficult to pay the debts and also your cards’ soaring interest rates. Moreover, with many debts to pay off, at some point there are chances you could miss repaying maybe one or two of them. Yes, you have the option to make the late payment charges, but your credit score has already been affected with the delayed payment.

Instead of paying debts with different interest rates, you could opt for a personal loan. The financing amount can be used to consolidate your total debt and you could pay off the amount until the end of the tenure. It saves you from the hassle of missing payments as you have consolidated all the payments into one.

Can Help in Establishing a Credit History

Companies that check an individual’s credit score assess different parameters before giving a score. The individual’s payment history is one of the most important factors which is considered. The other factors include the total amount owned by an individual, the duration of the credit history, new credit as well as credit mix. But what If you don’t have a credit history at all?

Not having a credit history is just like having a bad credit score. You need to establish a credit history so that banks and financial institutions know your creditworthiness and your ability to repay them. There are several ways to create your credit history, one of the ways is by applying for a personal loan. However, you must ensure to make your loan repayments on time, as loan defaulters get a bad credit score.

A Few Tips to Keep in Mind When You Apply for a Personal Loan

This is a list of key tips to follow when you are applying for a personal loan.

1. Go Through Your Credit Report.

No matter if you have defaulted on a payment or have applied for too many loans, you need to go through your credit report. By analyzing your report, you will be able to know the areas you need to work on and look for ways to improve the score. While applying for a personal loan can help to a great extent, there are many other factors that could increase your score. Understand the available options and work towards building a good credit history.

2. Make Your Loan Payments on Time.

Did you know that late payments will stay on your credit reports for years? Banks and other lenders go through an individual’s credit report when they offer financing. If they come across late payment, they will doubt your creditworthiness. Even before applying for the loan, learn how to manage your finances properly so that you don’t have to struggle with the additional burden.

3. Don’t Apply for Multiple Loans.

A bank will know how many loans you have applied for and how many times you have applied for a loan. This is because whenever you approach lenders for loans, it will be recorded in your credit history. This may give the impression that you have poor repayment capacity and your application could be declined. Even if you manage to get more than two or three loans, you need to see if you will be able to manage your monthly expenses properly before opting for a loan again.

4. Borrow What You Actually Need.

One of the mistakes people make is applying for a higher loan amount than they actually need. You end up paying a high-interest rate for the entire amount, including the amount you didn’t require in the first place. Apply for an amount you actually need to meet your short-term financial goals.

5. Compare Loans Offered by Various Banks.

All prominent banks across the world offer personal loans. However, you will come across some banks with better interest rates than others. Before applying for a loan, do your research and compare the loans offered by different banks. Then, shortlist the ones which come with the least interest rates. Also consider the tenure of the loan, the other fees and charges you need to pay, and the total amount of financing. Here are some of the top personal loans for 2020:

CompanyLoan AmountAPR
sofisofitrustpilotUp to $100,0005.99% - 16.19%


best personal loansbest personal loans$1,000 to $100,0005.99% to 35.99%


zippyloanbest personal loans$100 to $15,0005.99% - 35.99%


best personal loansbest personal loans$1,000 to $35,0007.99% - 35.99%



Want Free Money?

Simply sign up for Aspiration, and the free banking app will give you cash for free, you just relax while it gives you $100 just for opening a new debit card. There’s no catch. This bank account is legit and only takes two minutes to sign up for an account.

Learn more

The Best Apps to Save You Real Money

We are on our phone a lot, right? Wouldn't it make sense to save money with the best money saving apps?

AppAt a glancedownload
Get a $100 bonus at Aspiration when you open and fund an account with $10 or more. Then use your Aspiration debit card to make at least $1,000 worth of cumulative transactions within 60 days of account opening.
Open a new account in the next 24 hours and you could get up to $200 in free stock.
Truebill reviewTruebill
This free app delivers on its promise to save you money effortlessly. You can use it to lower your bills, cancel unwanted subscriptions and bill negotiations.

About the author

Brian Meiggs
Brian Meiggs
Brian Meiggs is a personal finance expert, and the founder of My Millennial Guide, a personal finance site helping you put more money in your pocket. He helps millennials follow the smart money in order to increase their earning potential and start building wealth for the the future. He regularly writes about side hustles, investing, and general personal finance topics aimed to help anyone earn more, pay off debt, and reach financial freedom. He has been quoted as a top personal finance blogger in major publications including Yahoo! Finance, NASDAQ, Discover, MSN Money and more.


Please enter your comment!
Please enter your name here

On a similar note...

Explore More On

7 Best Bank Bonuses and Promotions of April 2021

aspiration★★★★★This Company Will Give You $100 for Opening a Free Account
Boost your savings and earn up to 1.00% APY interest on your savings. Get up to 10% cash back on your purchases. Get $100 bonus when you spend your first $1,000 with your new Aspiration Plus Card.
personal capital★★★★★
The First and Only Interest Earning Crypto Account
Receive up to $250 Bitcoin bonus when you make qualifying deposits over the first 30 days. Receive up to 8.6% annually on your crypto. Join the most trusted financial services for crypto investors on the market.
personal capital★★★★★Get Up $200 in Free Stock for Joining
Commission-free stock, ETF and options trades. Get a free stock worth up to $200 when joining (must complete application). Simple, easy to use investor platform with no account minimums.
sofi★★★★★All-In-One Investing That's Easy to Use
Tired of Robinhood? Invest in stocks, ETFs, crypto, or automated investing in all one app. No commissions for stocks and ETFs. Complimentary access to SoFi Financial Planners.
personal capital★★★★★The Smart and Free Way to Manage Your Money
Take control of your finances with the perfect union of technology and highly personalized service. Get access to free online financial tools, including retirement planner, investment checkup, net worth calculator and more. Digital-first wealth management advisor with 24,000 clients in 50 states.
blooom★★★★★401K and IRA Management
Start your free 401k and IRA management now. Find and reduce hidden fees. Improve your diversification.
cit★★★★★Enjoy the Benefits of a CIT Bank Money Market Account
A CIT Bank Money Market Account helps you get more from your savings with interest rates for maximum growth. Earn over 7x the national average with high-interest rates. It now pays to open a money market account with CIT Bank.
My Millennial Guide