It is well known that installment loans are typically a great way for people with bad credit to still acquire a loan; however, it is good to understand how these loans may affect your credit so that you can get back on track towards having good credit once again. Below are three major things to note when it comes to considering your credit future while paying off an installment loan:
Low risk equals low score impact
Firstly, the debt from installment loans are typically stable relative to other types of loans over time; however, the early effects on your credit score of paying the fixed rates are also more modest. The stability of the installment loan comes both with good and bad news. In fact, it is the stability of the loan itself that actually explains why the debt payoff does not significantly improve your credit because it simply never lowers the score in the first place. The logic is that when a creditor is not worried about being paid back, there is less reason to incentivize you through a score deduction. It is not un-heard of to have a score between 650 and 750 or higher despite holding a six figure installment loan. On average the recipients of installment loans actually do hold a six figure amount of this debt, and there is no indication that this is a particularly more risky.
Prioritize making regular payments
Installment loans are unique because the total amount you receive has far less of impact on your credit score than the overall payment history does. Your history is considered in a more holistic way which can be an advantage to many with lesser but steady income streams. This means that making those regular payments in a timely way will ensure that when your history is reviewed you end up better off than you were before.
One should not shy away from installment loans due to the worry that they will not improve your score; in fact, it is actually very likely to improve. There is no disputing the fact that by lowering your balance by paying off your installment loan, that your credit will improve overall. As long as you pay careful attention to the advice above and use a steady income to ensure timely payments, your score will begin to better, however, in a relatively slow way compared with many other loans. It is therefore important to understand the importance of patience when improving your credit through an installment loan as they often are set to mature after a few or perhaps even a dozen years.
In general, installment loans are a very safe alternative to other options for those seeking to acquire money and improve their credit while doing so. It is important to understand that with these loans it is far more important to focus attention on the management of regular payments and a steady stream of income rather than paying off a dauntingly high balance. This is because with installment loans, a steep balance should simply not daunt you, including those with poor credit scores. Educate yourself further on the specific type of installment loan before receiving one so that you can cover the necessary steps to slowly and steadily improve your credit score.