7 Fiscal Reasons to Get Small Loans to Build Credit

The average American has more than $6,929 in credit card debt alone. That’s not including mortgage debt, auto loans, and student loans!

Unfortunately, credit card debt can take a major toll on your credit score, and the longer you carry a balance, the worse your score gets.

But there is hope. You can always use small loans to build credit and improve your rating.

By now, you’re probably wondering if taking out more debt to get rid of existing debt is a good idea. It seems counterintuitive, right?

The truth is, it can help you get your credit back on track. Here are a few reasons that using personal loans to build credit is a smart idea.

1. Helps Pay Off Higher Interest Rate Debt

The average credit card interest rate is 17.64 percent. You pay that interest rate on every penny you carry on your credit cards.

If you max out your cards, that can mean hundreds of dollars in interest payments each month.

Most personal loans offer much lower interest rates. Using them to pay off your credit card debt means lower interest payments for the life of the loan.

This means you’ll end up paying less to get rid of the same amount of debt.

2. Lowers Your Total Credit Utilization

Maxed out cards mean you’re using 100 percent of your available credit. This takes a huge toll on your credit score.

The higher your credit utilization is, the more it hurts your score. When you pay down the balance or use a small personal loan to pay off your cards entirely, you’ll have more credit available. The more available credit you have, the better your score will be.

But remember, because you have the credit available doesn’t mean you should use it. Instead, only use your cards to cover expenses that you know you can pay off in full at the end of the month.

3. Improves Payment History

Believe it or not, your credit score is also determined by your payment history. Missing payments because you forgot about them or didn’t have the money will cause your score to drop.

When you take out a small loan to build credit, you can set up automatic payments for the loan. The money gets taken out of your bank account every month on the same date.

You’ll never have to worry about missing a payment again. Once your payment history shows consistency, your credit score will improve.

4. You’re in Control of How Much You Borrow

Personal loans can be as little as a few hundred dollars or as much as several thousand. The amount you borrow is up to you.

You’re free to borrow enough to pay down your entire credit card balance if needed. What happens if you don’t have a credit card in the first place?

Having no credit score can be as bad as having a low credit score. A small loan helps you get started.

When you make payments every month and eventually pay off the loan entirely, you’re building your credit. You’re doing it without the hassle of having a credit card.

5. You Can Use the Money for Almost Anything

There are no restrictions on how you can use the money from your personal loan. You’re free to borrow funds to pay down debt, cover unexpected car repairs, and even pay for home improvements.

Since these loans offer lower interest rates than most credit cards, you’ll end up paying less for what you borrow.

Think of it this way: you could pay for the same things with a credit card. Doing so would increase your credit utilization and could mean hundreds of dollars going towards interest payments.

By using a personal loan, you’re helping keep your credit card balances as low as possible. This helps keep your credit score high.

6. Helps You Consolidate Debt

Personal loans are a great way to consolidate debt. Every loan and credit card you have likely has a different interest rate. This makes calculating payments tough and increases your risk of missing a payment altogether.

Consolidating your debt with a credit building loan means you’ll only have one payment to worry about each month. The more consistent you are with your payments, the better your credit will be.

And as an added bonus, you’ll pay less in interest each month. This means you can pay down the loan faster by paying more than the minimum amount each month.

7. Lets You Pay Your Bills During Rough Patches

Unfortunately, missing payments for utilities, rent, and other monthly expenses can hurt your credit. If money’s tight and your credit cards are already maxed out, what option do you have?

A small personal loan from dedicated direct lenders helps you get through those lean times. You can use the money to cover those bills and avoid collections, keeping your credit score as high as possible.

Should You Use Small Loans to Build Credit?

Every person’s situation is unique, but some people can benefit from using small loans to build credit.

Take a look at your financial situation and see what’s holding you back. Is it a high amount of credit card debt? Are you overwhelmed with multiple loans and struggling to juggle the payments?

If so, it’s something you might want to consider. There’s always more you can do to keep your finances in order in the long-run.

Check out our latest posts for helpful tips and tricks to keep your credit in check and your bank account full.