When it comes to qualifying for mortgage loans, low-interest credit cards, and auto financing, your credit rating is the name of the game. While there are specialty lenders who loan money to those with little credit history or a black mark on their record, only those with a credit score under 600 can expect to get the most favorable terms from mainstream lenders. There are a number of ways to improve your credit rating. One effective way is to take out a loan.

Can A Loan Help You Improve Your Credit Rating?

Using a Co-Signer

If you find yourself unable to qualify for any loan, you may want to consider bringing on a co-signer. It will probably be difficult to talk friends or associates with good credit to risk what they have on your sketchy record, but family may be up to the challenge. If you’re in a position to talk to your parents or boss about a co-sign, it could be the solution to qualifying for a loan that would otherwise be out of your reach.

Choose Carefully

By and large, financial experts do not recommend people with a poor credit history take on additional accounts. If you are having a hard time paying off your existing accounts, another loan may not be the answer. That said, if you choose your loan carefully and use the money to consolidate some of your other accounts, it could be worth it. A personal loan from the bank is likely to come with better interest rates than a credit card, for instance.

The Benefits to a Loan

Why is a loan preferable to an additional credit card account? There are a few reasons. Here are some of the biggest benefits to using a loan to improve your credit rating:

  • Personal loans are installment accounts. This means that the debt on such an account is far less dangerous to your credit score than a credit card account near the limit.
  • Mixed accounts are a good thing. Most lenders like to see a varied mixture of credit accounts on your history.
  • It can be used to decrease other forms of debt. If you have several credit card accounts you’re paying off, wiping them out with a single personal loan could have a beneficial impact on your credit score.

Catch 22

When people with bad credit hear they can improve their credit score with a loan, their first thought is probably, “But I can’t qualify for a loan because of the bad credit score!” This isn’t necessarily the case. For instance, though payday loans aren’t always registered by the three major credit reporting companies, some smaller companies will take note. These loans typically have no credit rating requirement which would make getting a cash advance a good solution if you need money quickly. By repaying this loan on time, this can help improve your credit rating. A small personal loan may also be possible. If you have a checking account, meet with a representative from your bank and discuss your options for taking out a loan. You may qualify for more than you think if you’ve kept your account in good standing.

How to Use a Loan to Improve Your Credit

Simply taking out a loan will do nothing to improve your credit rating. However, if you follow that up with a period of responsible accounting, it may very well raise your score. The most important factor is making your payments on time. Most late payments are reported to the credit agencies. If you do miss a payment, get current with your account as soon as possible. Don’t take on additional credit until you have your existing accounts under control. If you can show the reporting agencies a responsible history of loan repayment, you could qualify for larger and more favorable loans in the future.