How to Use a Personal Loan to Build Your Credit Score

How to Use a Personal Loan to Build Your Credit Score

A good credit score can open up opportunities for more favorable loan terms, lower interest rates for credit and personal finance. In this practical guide we will discuss how you can leverage a personal loan to build your credit score, paving the way for a healthier financial future.

Get to know your credit report

Start by obtaining a copy of your credit report. You can check it for free by creating an account with Credit Simple, which provides excellent tools to help you gain a better understanding of your credit score. Additionally, you are entitled to one free credit report per year from each of the three main credit reporting agencies in NZ: Centrix, illion, or Equifax. 

Credit scores typically range from 0 to 1,000, with a higher score indicating better creditworthiness - this usually indicates that you’re likely to be a lower risk to lenders and financial institutions, making you a more desirable borrower.

Establish a Positive Payment History

On time repayments is an important step in building good credit. By taking out a personal loan and making regular, on-time payments, you demonstrate responsible borrowing behavior. Ensure that you pay your loan installments in full and by the due date each month.

Diversify Your Credit Mix

Credit mix refers to the variety of credit types you have utilised. A personal loan can diversify your credit mix if you primarily have credit cards or no credit history at all. This diversification shows lenders that you can handle different types of credit responsibly, which can positively impact your credit score.

Avoid Excessive Credit Utilisation: Credit utilisation is the percentage of your available credit that you are currently using. High credit card balances can negatively affect your credit score. By consolidating your debts with a personal loan, you can reduce your credit utilisation ratio, which may boost your credit score.

Avoid Multiple Loan Applications

When you apply for multiple loans within a short period, it can raise concerns for lenders and negatively impact your credit score. Instead, research and choose a personal loan option that suits your needs and credit profile. A single loan application, followed by responsible borrowing, is a better approach.

Set Up Automatic Payments: Missing loan repayments can be detrimental to your credit score. To ensure you never miss a payment, consider setting up automatic payments through your bank. This will help you stay on track and maintain a positive payment history.

Monitoring Your Progress

Make sure to check your credit report regularly to keep tabs on your progress and see how your actions are positively affecting your credit score. It's also a great way to spot areas where you might need to make further improvements.

And don't forget: be patient and stay persistent. Improving your credit score takes time and calls for consistent effort and discipline. While you might not notice immediate results, practicing good financial habits will eventually bring about positive changes over the long haul.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion, and seek independent guidance.