Unlike Payday Loans, a Bad Credit Installment Loan Could Actually Help Your Credit Score
Payday loans might seem like a good solution when you’re hard-up for cash, but a bad credit installment loan could set you on the path to a better credit score.
When people take out a payday loan, they’re not usually thinking about their credit score. And why would they? The whole reason they’re turning to a payday loan is that they have poor credit in the first place. When a financial emergency rears its ugly head, and they need to cover those extra expenses, a payday loan is their best bad option.
But is it? We won’t keep you in suspense: No. No, it is not. There are several reasons why a person should take out a bad credit installment loan instead of a short-term payday loan. Lower interest rates are one. More affordable payments is another. When considering the reasons to take out an installment loan over a payday loan, those two are the most important.
In this post, however, we’re going to focus on a third reason: The right bad credit installment loan could actually help improve your credit score. Here’s how.
Payment history is important to your score.
Your credit score is the single most important number in your financial life. It determines what kinds of personal loans you’ll be able to access and the rates that you’ll pay for them. The most common type of credit score, the FICO score, is scored on a scale from 300 to 850. The higher your score the better, with 680 being the rough divider between good and not-so-good credit.
Your FICO score is created using information from your credit report, which is a document that tracks your history as a credit consumer over the past seven years. (Some information, like bankruptcies, stays on your report for longer than that.) You have three different credit reports, actually, one from each of the three major credit bureaus: Experian, TransUnion, and Equifax.
While the formula that FICO uses to create their score is top-secret, there is one thing we do know, and that’s the five different weighted factors that are used to create them: Payment History, Amounts Owed, Length of Credit History, Credit Mix, and New Credit Inquiries.
Of those five factors, Payment History is the most important. It makes up 35 percent of your total score—with your Amounts Owed coming in a close second at 30 percent. Payment history takes into account whether or not you pay your bills in full and on-time.
This is why one late payment can do some serious damage to your score—and why building up a positive payment history is crucial to raising a score that’s down in the dumps.
Find a lender who reports your payments.
Traditional lenders like banks always report payment information to the credit bureaus. But when it comes to bad credit lenders, the practice is far less common. Places that offer no credit check loans like cash advances or payday and title loans don’t care about their customers’ credit scores, so why would they report their payment information?
Well, it turns out that doing so can really help their customers! Positive payment information that’s reported to the credit bureaus gets added to a person’s credit report, meaning that it then gets factored into their credit score. More positive payment information will eventually translate to a higher score!
Then again, short-term bad credit loans like payday and title loans are meant to be paid off in a single lump sum payment (one that many customers have trouble affording). Plus, they wouldn’t have that much payment information to report anyway … unless you include the large portion of their customers who have to roll over or reborrow their loans and get trapped into a predatory cycle of debt …
Lenders like OppLoans, on the other hand, offer bad credit installment loans that are designed to be paid off in a series of regular payments—and they report their customers’ payment information to the bureaus. This means that every on-time payment you make on your installment loan is a positive mark on your credit report.
Taking the financial long view.
When you have bad credit and no money in savings, it can be hard to think about anything other than the financial problem that’s sitting right in front of you. When you have to get your car repaired in order to get to work the next morning, why would you care about the impact a given loan would have on your credit score? You’ve got bigger fish to fry!
But if you’re always taking the short-term view, you’re never going to fix the real problem. Ignoring your credit score means getting stuck with high interest rates and loan payments that will eat up a sizeable chunk of your budget. Instead of putting money into savings in order to build an emergency fund, all those extra funds will go towards fees and interest.
Breaking the debt cycle isn’t easy, and it’s not something that a single loan is going to solve. But choosing a safe, affordable installment loan that will help build your credit over a predatory payday loan is a good first step to take. To learn more about putting your finances on a more solid footing, check out these related posts and articles from OppLoans:
- A Beginner’s Guide to Budgeting
- From Budget to Baller: 6 Tips to Grow Your Money
- Your Guide to Escaping a Debt Trap
- 8 Ways To Save Money Today, Tomorrow and Every Day After