Build your credit using an installment loan. Is that even possible? After all, you have many ways to build credit, so is a loan your best option? The answer is yes, providing you need to borrow money.

Still, you will need to choose the right lender and loan and you need to understand how you should handle your loan too. Otherwise, you will not improve your credit scores.

What is an Installment Loan?

An installment loan is a form of credit that provides a lump sum of money. You pay this money back plus interest in fixed amounts or “installments, typically on a monthly basis.

How long you take to pay back the long affects your payment amount. A longer “term” leads to lower payments, but you also pay more interest. As a rule, you should choose payments that you can comfortably afford within your budget.

The interest rate on an installment loan can vary greatly between lenders. That is why it is extremely important that you shop around for the best rate. However, you should go about this carefully.

Always choose a lender or broker that uses a pre-approval process. This does not affect your credit scores. Many mainstream brokers do not use a pre-approval or pre-qualification process. This means they access your credit information using a hard credit inquiry. This lowers your credit scores for up to two years.

Types of Installment Loans

Installment loans are available for many uses and in various amounts. Common examples include mortgages for buying or refinancing homes, auto loans specifically for buying vehicles, and personal installment loans that can be used for almost anything else.

How Installment Loans Work

If you’re wondering how installment loans work the process is usually quite simple when you choose a good broker or lender. You can either apply online or in-person, but the complexity of the requirements depends on the lender.

Generally, online lenders are less strict than in-person lenders. That’s because they cater to modern borrowers that don’t have the time or energy for a complicated loan process. Even though these lenders have a simple process, the best ones are still as trustworthy and reliable as any mainstream lender.

How do Installment Loans Differ From Revolving Credit?

Typically, credit falls into two general categories: revolving and installment. Revolving credit offers ongoing access to a pre-approved amount. Examples include credit cards or a line of credit through your bank.

While revolving credit is convenient, interest accumulates on the unpaid balance. This “compound” interest can make it hard to pay down your debt, even when you make regular payments. That’s why revolving credit isn’t usually a good choice for large purchases.

Regrettably, it is also very easy to accumulate debt when you use revolving credit. Credit is available to you as long you make minimum payments. That might explain why credit card balances in the U.S. continue to rise as well as delinquent accounts.

On the other hand, installment credit uses simple interest. The lender calculates the amount of interest based on the interest rate and length of the loan. They then divide the interest owed into equal amounts. You do not pay interest on the unpaid balance. Instead, every payment pays a portion towards the principal amount you owe and interest.

Your payments remain fixed and you know precisely when you will pay off your installment loan. You can’t increase the amount of your existing loan. However, you can apply for a new loan once you’ve paid off the one you already have or consolidate your loans. Luckily, a good installment loans allows you to pay more than your scheduled payments without penalty if you want to speed up the process.

How You Can Use an Installment Loan to Build Your Credit

We already mentioned that you can use an installment loan to build your credit. Now, we’ll look at the things you need to do to make it happen.

Establish Payment History

Your payment history is the number one factor used in the calculation of your credit scores. Most scoring models assign at least 35% to how well you make your payments.

Since installment loans are built around regularity, predictable performance can definitely boost your credit scores. Just make sure your chosen lender reports to at least one of the credit reporting agencies: Experian, Equifax, or Transunion. If you’re not sure whether they do or not, ask before you borrow.

You can build your credit score over time, no matter where your credit stood before you started. Just remember, it doesn’t happen instantly. Lenders notify the credit reporting agencies regularly, but change happens as trust builds.

Pay on Time

When it comes to building your credit, paying on time is crucial. One of the best ways to do this is through automatic payments. Almost all lenders offer this option and some may require direct debit as part of their approval process. Considering the serious hit a missed payment can have on your credit, automating payments make a lot of sense.

A payment that is 30 days or more past due is usually reported to the credit bureaus. Just one missed payment can lower your credit scores significantly and the information can stay on your credit reports for up to seven years. You can’t remove it either; it just fades away with time as you prove that you’re reliable again.

Mix it Up

Taking out an installment loan can be a good choice when it increases your credit mix. Your credit mix refers to the variety of credit types you have such as credit cards, loans, mortgages, etc.

Credit mix accounts for 10% of your overall credit scores. While this isn’t major, every little bit helps when you’re trying to build your credit. As mentioned, credit cards aren’t really a good option for major purchases or expenses anyway. Choose an installment loan instead to mix it up and boost your credit.

Lower Your Credit Utilization

Do you already have credit card debt? Are you looking to consolidate it so you can manage your finances better? If so, an installment loan can be a great solution. Here’s why.

First, most people don’t know what a CCU ratio is, never mind what it does. Your credit utilization ratio measures the amount of revolving credit you have used compared to what’s available to you. It accounts for about 30% of your credit scores.

Second, understanding credit scores is very important since your CCU affects it. When your CCU is high, it can lower your credit scores. However, an installment loan can consolidate your debt and lower your CCU. This makes your life a whole lot easier by streamlining your debts into a single payment and it also helps you build your credit.

Monitor Your Debt-to-Income Ratio

Whenever you take out a new credit account, it affects the “amount owed” portion of your credit score. This usually makes up about 30% of your overall rating.

Always keep on top of how much you owe. The easiest way to do this is by monitoring your DTI, or debt-to-income ratio. Lenders generally prefer a DTI ratio of no more than 36%. Some lenders allow a higher ratio, but also charge higher interest rates.

Tips to Help You Build Your Credit with an Installment Loan

Besides what we’ve mentioned above, these are a few more things you can do to build your credit with an installment loan.

Only borrow what you need – Even if you qualify for a greater amount, don’t borrow more than you need. You pay interest on your loan and every dollar increases your debt load.

Monitor your credit scores – Building credit takes time, but that doesn’t mean you should assume things are moving in the right direction. Get your free credit scores and don’t forget to look for errors on your free credit reports too. You should see a gradual upwards movement.

Increase your available credit limits – You can lower your credit utilization ratio by asking for an increase on your credit cards. Just don’t use the credit or you will defeat the purpose.

Report your payments – You may be able to self-report good payment information to the credit bureaus. Examples include your timely utility bills, rent, cellphone, internet, cable TV, and streaming service payments. Experian Boost®, UltraFICO®, and other services can help you, but they are not free.

Checking Terms & Lenders

One of the best ways to check lenders and terms is through a loan broker with a pre-approval process. You fill out one application form, the broker assesses your information, and then forwards it to appropriate lenders.

This not only does a lot of legwork for you, but also eliminates lenders that don’t offer what you need. Plus, the process does not affect your credit. You’re shown what each interested lender has to offer so that you can quickly and easily choose the best.

Checking out lenders should be done through independent review websites such as TrustPilot. You’ll get useful information on customer service, loans, and more instead of rantings from disgruntled applicants that didn’t get a loan.

When you’re doing your comparisons, don’t forget to look at fees. Some lenders are fee-free and accept additional payments at any time. Others charge an origination fee for setting up your account and prepayment penalties if you want to pay more than your scheduled payments.

FlexMoney Can Help You Build Your Credit

FlexMoney lenders report to the credit bureaus and our practices encourage responsible repayment. Worried about what to expect? Don’t be. The process is simple and fast.

A good installment loan is a valuable financial tool you can use to build your credit and pay expenses. Our methods make it easy for you to establish a track record of consistent, on-time payments which improves your credit over time.

Applying for a credit-building loan is a breeze when you choose FlexMoney USA. We have access to a network of reputable U.S. lenders offering loans ranging between $200 and $35,000. Check what’s available to you in minutes, without lowering your credit scores.