In this day and age, debt is still negative connotations in the United States. No wonder why applying for installment loans in Boise, Salt Lake City, Portland, or Seattle are married to social stigma. Although many Americans live off debt, it can severely burden an average consumer for a long time.
While it is fair to consider debt a dirty word under certain circumstances, using credit can improve your life in many ways. If you use an installment loan right, it can increase your FICO scores and unlock more favorable financial products for you in the future.
Reducing Your Overall Debt
Indeed, an installment loan will increase your level of indebtedness. However, spending the proceeds from it to consolidate your other financial obligations you can’t otherwise manage properly can turn it into good debt.
A classic example is taking out a sizable loan to zero out your credit card bills. Taking care of the minimum payments of your credit cards will not pull down your FICO scores, but the unpaid balances are penalized with interest. Keeping doing it for a while, and you will be in a deep credit card debt hole.
If you can trade several debts for one loan to reduce your exposure to interest, lower your monthly liabilities, and add predictability to them, go for it in a heartbeat.
An installment loan is one of the best tools for the avalanche repayment approach. It allows you to erase your debts with the highest interest rates first, so you do not get punished that much for not paying off your bills.
Furthermore, keeping the utilization rates of your credit cards to a minimum can improve your FICO scores more quickly. Ideally, you should use less than 30% of your overall and per-card credit limit. If you have mismanaged your plastic in the past, an installment loan can help you bounce back and begin outnumbering the derogatory marks on your credit reports with positive ones with punctual payment.
Allowing Your Credit to “Age”
An installment loan with a multi-year term can help increase the average age of your credit accounts. This factor represents 15% of your FICO scores, so having active old accounts is a significant contributor to your creditworthiness.
Complementing Your Credit Card Usage
Credit mix accounts for 10% of FICO scoring models in general. Using your credit cards moderately while keeping your installment loan account current is more impressive in the eyes of creditors, insurance companies, landlords, employers, and more.
But then again, not all installment loan payments get submitted to the credit bureaus. For instance, title lenders are notorious for not reporting to Experian, Equifax, and TransUnion. Some proactively do, but it is not a requirement.
It helps to ask your prospective installment loan lender if your payments will be reported. If they will not, your good deeds might not make it to the credit bureaus unless you find a way to report them yourself.
When acquiring any debt, it is imperative to analyze the upsides and flip sides. It is a crime to focus just on one and ignore the other because the duality of credit is what makes beneficial or harmful.
