Is building credit really worth taking out a personal loan? The short answer is yes, and no.
Which answer you land on will depend on what you use the money for, how much you borrow, and how you manage the loan going forward.
When it’s time for you to shop around for credit building loans, consider the following before making a final selection.
1. Don’t borrow the money for just anything
It’s never worth taking on new debt just for the sake of building credit. So whatever you do, don’t spend the money from credit building loans on something you do not need.
The best things do with a personal loan
Pay off high-interest credit cards. In this way, one debt eliminates the other. The personal loan is new, but the debt amount essentially stays the same.
High-interest student loans can be good bets for credit building loans too, but only if you’ve done your homework.
For instance, if you use a personal loan to pay off federal student loans, you lose federal protections. So if there comes a time when you’re struggling to make your personal loan payment, you no longer have the option of income-driven repayment plans, forbearance, or deferment.
The worst thing to do with a personal loan
Spend it on unnecessary things or experiences like clothes, a vacation, or a brand new car when you already own one that’s in good shape.
Now, if you really do need a car, a personal loan might be a great idea, especially if you need it now and don’t have the cash on hand to buy it outright. You’re probably going to find a better deal on a personal loan through a bank than by financing through the dealership.
2. Shop around for credit building loans
The best personal loan probably isn’t going to show up in your mailbox or in a targeted online ad.
Instead, the best personal loans to build credit are found when you seek them out and do a side-by-side comparison.
Things to look for in credit building loans
- Eligibility requirements like credit score, payment history, and income
- Borrowing limits
- Length of the loan
- Interest rates
- Origination fees
Check out the table to compare two of the best online personal loan lenders.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||Rates (APR)||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
|7.73% – 29.99%||$1,000 - $50,000|
|6.28% – 14.87%1||$5,000 - $100,000|
|6.87% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%||$5,000 - $35,000|
|4.99% – 29.99%||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%2||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%||$2,000 - $25,000||Visit LendingPoint|
|5.99% – 35.89%||$1,000 - $40,000||Visit LendingClub|
|5.49% – 18.24%||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%||$2,000 - $35,000||Visit Avant|
3. Borrow as little as possible
One of the principal building blocks of good credit is staying out of debt.
So if you want a personal loan to help you build your credit, the last thing you want to do is borrow more than you need. That will just keep you in debt longer.
Do the math – taking into account the origination fee – and only ask for that amount for your credit building loans.
4. Automate your payments
As much as a personal loan can help your credit, all it takes is one late payment to make things worse.
After all, what you’re trying to prove with a personal loan is that you can handle credit responsibly. Paying your bills on time is the most important part of credit building loans.
Make sure you make your loan payments–on time, every time–by setting up automatic loan payments through your bank account.
5. Avoid racking up new debt
When you use a personal loan to pay off credit cards, you’re not out of the woods just yet.
Not only do you have the new credit building loans to make payments on. You also have all that available credit on the cards you just paid off–a temptation that often proves too much for many. There are only two options for handling this responsibly.
The first option is to return your credit cards to a zero balance every month. If you can’t do that, then the second option is to cancel them.
Yes, canceling your credit cards will affect your credit utilization ratio. But that’s far preferable to maxing out your credit cards again, which would pretty much negate the benefit of the personal loan that previously wiped the debt clean.
The thing is, you didn’t take out a personal loan to pay off credit cards just so you can max them out again. You took out the personal loan to help your credit, not hurt it by racking up more debt.
6. Follow other good credit practices
Here’s a list of the most important practices to follow when it comes to credit building loans.
- Pay all of your bills on time, every time
- Pay down unpaid debt as aggressively as possible
- Don’t use more than 30 percent of your available credit
- Check your credit reports every 12 months through AnnualCreditReport
- If you find errors on your credit reports, dispute them with the credit bureaus
- Before paying off a debt through a collection agency, ask them to verify the debt first
- If a collection agency verifies a debt, negotiate the payoff amount and the removal of the negative listing from your credit reports
In other words, there are numerous things you can do to build your credit. So weigh the pros and cons of small loans to build credit very carefully.
If you use credit building loans incorrectly, they can hurt your score and drag you deeper into debt. But if you use them responsibly, credit building loans can boost your score and save you money in the long-run.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Rates (APR)||Eligible Degrees|
|Get real rates from up to 4 Lenders at once
Check out the testimonials and our in-depth reviews!
|2.57% – 6.32%||Undergrad & Graduate||Visit Earnest|
|2.80% – 7.02%||Undergrad & Graduate||Visit Laurel Road|
|2.51% – 7.80%||Undergrad & Graduate||Visit SoFi|
|2.76% – 8.54%||Undergrad & Graduate||Visit Lendkey|
|2.57% – 6.65%||Undergrad & Graduate||Visit CommonBond|
|2.75% – 8.69%||Undergrad & Graduate||Visit Citizens|