6 Steps For Building Your Credit With a Personal Loan

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!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.29% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.29% APR assumes current 1-month LIBOR rate of 1.34% plus 4.20% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000Visit Upstart
5.29% - 14.24%1$5,000 - $100,000Visit SoFi
8.00% - 25.00%$5,000 - $35,000Visit Payoff
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print, understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

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!
LenderRates (APR)Eligible Degrees 
Check out the testimonials and our in-depth reviews!
2.75% - 7.24%Undergrad
& Graduate
Visit SoFi
2.57% - 6.39%Undergrad
& Graduate
Visit Earnest
2.57% - 7.12%Undergrad
& Graduate
Visit CommonBond
2.99% - 6.99%Undergrad
& Graduate
Visit Laurel Road
2.74% - 7.26%Undergrad
& Graduate
Visit Lendkey
2.89% - 8.33%Undergrad
& Graduate
Visit Citizens
Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print, understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.