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- I took out a personal loan of $2000 for two years for the sole purpose of improving my credit score.
- I deposited the loan amount in a separate account to ensure it would not be touched, which prevented me from spending recklessly.
- By setting up automatic monthly withdrawals from this account, I made all my payments on time for two years.
In college, my goal was to stay out of debt. I avoided taking out student loans by attending the school that offered me the best scholarships. In my mind, finances were black and white. Loans and debts were very bad.
When I graduated, I knew it was time to start Building credit. I needed strong credit if I wanted to move out of my parents’ house, get a good credit card, and buy a house one day.
So, I did something I swore I would never do: I got out Personal loan.
Made my personal loan work for me
I was avoiding loans for good reason: I didn’t want to get into debt. However, I have learned that if I strategize, a personal loan can work in my favor.
I have requested a personal loan from my bank. I thought about taking out a one year loan because I didn’t want to have debt hanging over my head. However, after talking to my parents and a banker, I got a loan of $2,000 for two years. Consistently making on-time payments on a long-term loan would demonstrate greater reliability and help my credit score.
Right after graduating from college, many of my friends decided to improve their credit scores by applying for… Initial credit cards. They thought this was the perfect time to make a big purchase, like a TV or a sofa. Others bought groceries or gas with their cards and paid them off immediately to build credit.
Choose A Personal loan vs credit card Requires less work on my part. It also kept me from getting into more debt, and looking at myself at 22, I definitely would have fallen into credit card debt.
When I got a loan, I opened a new bank account so I could keep the loan money in a separate place. This way, I won’t be tempted to touch the money. I then set up automatic monthly withdrawals from this account so I never miss a payment.
As a result, all you actually paid on that loan is the accrued interest. Fortunately, my father agreed to be my assistant. He had excellent credit, which helped me get one of the best Personal loan rates At the time – just under 7%. This means I paid about $150 over two years to improve my credit score. But considering that a better credit score helped me get lower rates on other types of loans later, the 7% interest was worth the cost.
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How a personal loan helped me in the long term
Before I paid off the personal loan, my credit score was “good,” which means A FICO score Between 670 and 739. When I was a child, my father added me as a person An authorized user on one of his credit cardsAnd since he never defaulted, I ended up getting a good result.
(Fun fact: My dad totally forgot he made me an authorized user, so this was a nice surprise when we visited the bank to apply for my loan!)
At the end of the two years, my score was above 700, or “very good” according to FICO standards. So, was this two-year personal loan worth it? What made me go from “good” to “very good”?
It gave me options.
As your credit score increases, you can qualify for increasingly better credit cards. With a ‘Very Good’ score, I didn’t have to accept any credit cards – I had a choice Best credit cards. I applied and was approved Best Chase credit cards Which offered a lot of travel benefits, which at the time included a sign-up bonus. (Depending on when you file, Chase’s Credit card rewards It may be higher than it was at the time.)
Not only did I qualify for this card, but my very good credit score helped me get relatively low interest rates. Anytime I wasn’t able to pay my statement balance in full over the years, interest accrued, but the lower interest rate resulted in me paying less in the long run.
A very good score also gives me choices about where I live. Between my husband’s job and graduate school, we’ve moved frequently over the past six years. Every time we moved, we had to apply to live in a new apartment. With my strong grades, being approved for an apartment wasn’t too difficult.
In 2022, my husband and I finally reached our goal of purchasing our first home. Not only did our high credit scores help us get approved for a mortgage, but they also helped us get a relatively low 30 year mortgage rate And low Private mortgage insurance Costs. The $150 I paid in interest on my personal loan would ultimately save me tens of thousands of dollars on my mortgage.
At first, I was worried that taking out a personal loan would complicate my life. However, being strategic about my loans made my life easier for almost a full decade.
This article was originally published in May 2023.