Can personal loan improve credit scores?

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smithjohn
 
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Can personal loan improve credit scores?

Postby smithjohn » Tue Aug 30, 2016 1:06 am

I'm wondering would taking personal loan improve credit scores. My situation is that I have scores in high 700s (from chase and discover's free credit scores), both also mentioned that lack of installment loans is affecting the scores.
So if I take some personal loans (such as the discover one) with amounts significantly lower than my combined credit card CL, would that help the scores in any meaningful way despite the HP(i.e. over 800 would be great, increasing 3 points not so much)? Would it make any difference if I pay it off sooner (i.e. would that result in less increase? because that would mean less interest payment)?

Many Thanks!


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PhillyPhoto
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Re: Can personal loan improve credit scores?

Postby PhillyPhoto » Tue Aug 30, 2016 9:53 am

Having a diverse credit portfolio will always help. The loan amount has nothing to do with your credit utilization, so don't feel you need a small loan amount in relation to your overall revolving credit limits to make it "look better". Of course, don't take out so much that the interest is making the loan vs credit score increase not worth it either. If you want, take out a $1000 loan for 12-24 months, and just put the money in an account on auto pay, and add a little more to cover the interest, that would work. The number of payments have more to do with showing you can reliably pay back money consistently over time. So it's more important to your score from that stand point than the number of interest payments they received.

All that said, with a score in the high 700s, it may not even be worth it to get a loan just for the sake of adding it to your credit report. You should wait until you actually need the loan for something you'll use the money on and then get it. Otherwise, you're just wasting money on the interest at this point.
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takeshi
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Re: Can personal loan improve credit scores?

Postby takeshi » Wed Aug 31, 2016 8:28 am

If you don't have any active installments then an installment can help with Credit Mix. However, Credit Mix is a small factor.
http://www.myfico.com/crediteducation/w ... score.aspx

I'd recommend getting products as your financial needs dictate versus for scoring purposes. Don't just obsess over scores and the cited reasons. Even with FICO 8's in the 800's I'm seeing reasons listed and I'm well above the 740-760 range where best terms are generally offered. What are you not able to accomplish with your current scores that you would with higher scores?

smithjohn wrote:So if I take some personal loans (such as the discover one) with amounts significantly lower than my combined credit card CL, would that help the scores in any meaningful way despite the HP(i.e. over 800 would be great, increasing 3 points not so much)? Would it make any difference if I pay it off sooner

You need to consider the standard factors. The HP is the least significant of them despite how people tend to obsess over them.

By opening a new credit account you will drop your AAoA (Length of Credit History). To what degree we can't tell you but can do the math yourself to see. AAoA is just like any other average. You add up the ages of the accounts and divide by the number of accounts, including the closed accounts on your report. All we can say is that generally those with more accounts that are aged will see less of a hit than those with fewer and younger accounts.

You'll only see a benefit to Credit Mix while the installment is open. Once you've paid it off you'll lose that scoring benefit.

The balance to loan ratio on an installment does factor into Amounts Owed but it does not have the same impact as revolving utilization on your revolving accounts.

There's also an impact just from having new accounts that many tend to overlook. The impact is going to depend on credit profile. Thicker/stronger profiles will see less of an impact than thinner/weaker profiles.

smithjohn wrote:because that would mean less interest payment)?

Where is interest in the pie in the link that I provided?


tl;dr -- probably not worth it. What are your current score (indicate both model & CRA) and why are you worried over them?

dickey1331
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Re: Can personal loan improve credit scores?

Postby dickey1331 » Thu Sep 01, 2016 3:09 am

I took out a personal loan a few years ago to consolidate some of my credit card debt and it improved my credit score but my score was a little lower than yours.
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