Learn the Difference Between Helpful and Harmful Installment Loans
Having a healthy mix of credit—including installment loans—is a great way to increase your credit score. The best credit scores have three to five revolving credit cards, an installment loan, and a mortgage.
Obviously, getting a mortgage is a big commitment, so you should only do this if you actually want to buy a house. But adding an installment loan to your credit report is easy; it doesn’t have to be as complicated as applying for a car loan. A lot of places—and not just car companies—sell products using installment loans. If you need furniture, a computer, or other household appliances, you might consider purchasing them through an installment loan.
But make sure you are applying for an installment loan, and not some other type of credit. A lot of stores offer credit cards that help you finance the account—these are not the same things as installment loans. And other stores offer finance accounts, which are harmful installment loans. These accounts allow you to delay payment, or offer no interest until a later date. If you buy a piece of furniture using a loan that allows you to delay payments for six months, or pay no interest until the following year, you are likely applying for a harmful installment loan.
To make sure you are applying for a helpful installment loan, simply ask to speak to the credit representative. The sales associate likely will not know the difference, so get on the phone with the person representing the bank that is offering the loan because some types of loans will actually hurt your credit score!
Another option for adding an installment loan to your credit report is available for people who own their cars. Walk into your local bank or credit union and ask for a small installment loan on your existing car. The loan does not have to be large—try applying for a $1000 installment loan that you will pay off over six or twelve payments.
Keep in mind that you will pay interest on this loan, but if you pay the loan off quickly and keep it small, the interest will be nominal. If you have bad credit, this will quickly help you increase your credit score, which will pay dividends on future mortgages, installment loans and credit cards.