If you are looking to build or repair your credit, the best way is to take on debt in which you will pay on time and pay off in full in the near future. Having a credit card or a personal loan is a good start to climb up your credit ladder.
Between the two, a personal loan has many benefits to help increase your credit score compared to taking a credit card. Here are some specific reasons on why:
Fixed Payment Plan
Personal loans usually have a time-table of payments once taking out the loan, called installment payments. This set of repayment periods will not only help you get into a rhythm of paying the loan off but also know the amount it is every payment period, so you can budget accordingly. As opposed to credit cards which can fluctuate based on your spending.
Also because they are seen as less risky for lenders and creditors than having a revolving line such as a credit card, the debt of personal loans are less detrimental to your credit score if they are similar in amounts.
Also, because a personal loan has a set end date, paying it off completely is a goal visualized from the start. Compared to a credit card that has the ability to entice you to keep on taking more debt even after paying it off in full.
Debt to Available Credit
You might have bad credit simply because of high debt ratio to the available credit. For example, if you constantly have a balance 80- 90 percent of your credit card limit, your credit score will be negatively impacted.
A personal loan does not have this “debt-to-available credit” ratio because you have an installment debt. Consolidating any high revolving credit debt with an installment loan is a good idea. Once you reduce this ratio, also known as utilization ratio, your credit score may improve dramatically.
Flexible Credit Requirements
Personal loan lenders will approve borrowers who have no credit or bad credit, as opposed to most credit card companies issued by banks. This is because lenders assess your current situation on a more personal level, as opposed to credit card companies who many times solely base the approval process on your current score.
Before committing to any one type of credit, discuss with personal lenders your current situation and what their loan features do to help build your credit standing. Weight the costs and terms to make the best decision.