How a Personal Loan Could Help Build Credit

Personal loans can be a great option for debt consolidation, home and auto repair, and much more. But did you know that a personal loan can help build your credit as well if you manage it properly?

From improving your payment history to adding to your credit mix, we’ve gathered the top ways a personal loan can positively affect your credit score so you can decide if it’s right for you.

Why having good credit is important

Before discussing the impact of a personal loan on your credit, it’s important to understand what credit is and how it works.

Credit is an essential building block of personal finance. It not only determines if you can get a loan, but what kind of interest rate you’ll receive. Insurance companies, phone and utility companies, employers and landlords can also check your credit when deciding to approve your application or service request.

To learn more about the importance of credit, as well as how it’s measured and some simple tips to boost your score, check out our free online credit course.

Personal loans to help build credit

Can taking out a personal loan help build credit? Handled responsibly, yes. Here are some ways a personal loan can increase your credit score.

  • Improve or maintain payment history
    Making up a whopping 35% of your credit,1 payment history can significantly impact your score. Obtaining a personal loan, then making your monthly payment on time every month, can help give your credit a major boost. Timely payments can also help you avoid late fees and other charges from your lender.

  • Reduce your credit utilization ratio
    Credit utilization starts with understanding revolving credit, a financial term for loans like credit cards that let you borrow money as needed without a specific time to pay off the full amount. Your credit utilization ratio represents the amount of revolving credit you’re using versus how much you have left.If you decide to pay off credit card debt with a personal loan, you can reduce the amount of revolving debt you owe, which could lower your credit utilization ratio and raise your score. And, since your credit utilization ratio is based solely on revolving credit, a personal loan (a type of installment loan) does not add to it.2

  • Add a different type of credit to your credit report
    Variety can be good for your credit. Since your credit mix accounts for approximately 10% of your score, opening a personal loan (or similar installment loan) can also strengthen your credit when kept in good standing.

  • Increase your credit history
    When it comes to your credit score, the longer you have an account in good standing, the better. If you need to start building your credit history, getting a personal loan, then paying it on time for the length of the loan, is a great way to get started.3

Interested in exploring how a personal loan can you achieve financial goals? See how a OneMain personal loan can help.

Use a personal loan wisely

When managed correctly, personal loans can boost your credit. But it’s only one way to help strengthen your score. Building your credit takes time and effort. Make the right moves, stay on track and your credit will reflect your efforts!

1. Jayakumar, Amrita. “How Does Payment History Affect Your Credit Score?” NerdWallet.com. https://www.nerdwallet.com/article/finance/payment-history-affect-credit-score (accessed April 9, 2021).
2. Axelton, Karen. “How Does a Personal Loan Affect Your Credit Score?” Experian.com. https://www.experian.com/blogs/ask-experian/how-does-a-personal-loan-impact-your-credit (accessed April 6, 2021).
3. Luthi, Ben. “Should I get a personal loan to build credit?” CreditKarma.com. https://www.creditkarma.com/personal-loans/i/loan-to-build-credit (accessed April 6, 2021).

* This article has been updated from previous postings on October 2, 2018, and April 22, 2015. Matt Diehl and Lisa Weinberger were prior contributors.