The average Canadian has a credit score of around 600, which is actually pretty good.
Sadly, that isn’t the case for all Canadians. If you fall below the average credit score, your financial future could be full of roadblocks along the way.
But don’t fret — there are ways to use a personal loan to build credit. Keep reading to discover tips for using a loan to build up your credit score.
Why Do You Need a Good Credit Score
Before we get into the specifics of personal loans, let’s talk about why you need a good credit score in the first place.
Having a good credit score shows potential lenders that you’re responsible with your money. When a lender feels they can trust you, they’re more willing to give you a favorable loan. A low-interest rate comes in handy when applying for anything from a mortgage to a vehicle loan.
But, credit scores aren’t only looked at by lenders. Potential employers have the option to look at your credit score to determine your responsibility. Also, if you need to rent a home or apartment, your credit will be checked during the application process.
Now that you know why a good credit score is important, keep reading to learn how personal loans can help you achieve one.
Start a Credit History
If you’re young or have avoided credit over the course of your life, you may actually not have a credit score at all. In fact, over 45 million adults have no FICO score.
Not having a credit score means that you currently don’t owe lenders any money, which is great. But this can make it hard for lenders to trust you when you do need a loan.
Fifteen percent of your credit score is based on the age of your credit. Meaning, the longer credit history you have, the higher the score you can receive.
This is where you can use personal loans to build credit. As soon as you realize you don’t have a credit score, take out a small personal loan. This will start the clock on your credit history and give your score a boost in the right direction.
Use a Personal Loan to Consolidate Debts
While lenders like to see that you have a history with credit, they don’t like to see too much of a history. There is a very fine line to balance when it comes to how much debt you should carry at once.
This is where the credit utilization ratio comes into play. This is the amount of credit you’re using compared to how much you have available to you. Experts say that you should aim for a thirty percent or lower credit utilization ratio.
So how can a personal loan help with that? You can use a personal loan to consolidate your credit card debts, improving your credit score.
For example, imagine you have five credit cards to your name and they’re all maxed out. This would appear as a credit utilization ratio of one hundred percent.
To change this, you would take a personal loan out for the amount you owe on all the cards combined. Then, pay off your credit cards using the personal loan and make one payment on the personal loan each month.
You would keep your credit card accounts open after paying them off to shift your credit utilization ratio. Freeing up these balances would quickly raise your score.
Set up Auto Payments on the Loan
Another way you can use a small loan to build credit is by improving your payment history.
Your payment history accounts for thirty-five percent of your credit score, larger than any other factor. So if you’ve missed a few payments in your past, your score may be suffering.
Increase your payment history percentage by taking out a personal loan. Then, set up for the payments to be automatically taken from your bank account each month. This ensures that you’ll never be late on paying back this loan.
Having a loan with a one hundred percent payment history will help offset any late payments on your credit history. And if you use this trick on all your debts, you’ll avoid any future dings on your payment history.
Avoid Applying for Multiple Loans at Once
So far, everything you’ve read about using loans to build credit has been positive. But, this doesn’t mean you should go out and apply for as many loans as possible. Applying for too many loans can actually have a negative effect on your credit score.
Every time you apply for a loan, a lender performs a hard inquiry on your credit history. A few hard inquiries are expected and won’t affect your credit score. But, once you have more than five on your credit history, these start to count against you.
The good news is that these hard inquiries usually fall off your credit history after a few years.
That’s why you should find a trusted lender and look at their lending criteria before applying. You don’t want to get denied for a loan and receive a hard inquiry on your credit history for nothing.
Bad Credit? Use a Personal Loan to Build Credit
Are you suffering from bad credit or even no credit? Feeling like your credit score is getting in the way of your financial future?
Use a personal loan to build credit through the tips outlined above!
Not sure where to get a personal loan? Captain Cash offers fast cash loan approval in Canada. Simply complete the application form, get approved, and receive the money in your account quickly.
Have questions about the process or want to learn more? Contact the team at Captain Cash today!