Can Installment Loans Be Used to Improve My Credit Score?

by User Not Found Apr 8, 2025, 13:59 PM

Discover how installment loans can impact your credit score, build your credit history, and improve your financial health with responsible borrowing

With so many competing properties in life, it can be easy to forget about something like your credit score. After all, it’s just a score, right? Well, here’s the thing: your credit score is far more important than you think. And while it can be easy to forget about, we can assure you that when it comes time to apply for a loan, you’ll be wishing you had been paying more attention. 

But what can you do to improve your credit score, and what is a good credit score? In this article, we’ll answer both of those questions and more. By the end, you’ll have all the information you need to take action and get the needle moving in the right direction. 

How is Your Credit Score Calculated? 

To understand how to improve your credit score, it’s important to step back and understand how the score is calculated in the first place. Your credit score will fall within a range of 300 to 850. The higher the score, the better it is. Presently, the average credit score in the U.S. is 717, which falls in the “good” category. 

Your credit score is calculated using five unique factors. Here’s what they are:

1. Payment History

This is absolutely the most important factor when calculating your credit score. In fact, this factor is responsible for 35% of your overall score. This means that making your payments to other lenders and creditors on time is super important. It shows potential new lenders that you are responsible with your money and understand your financial obligation.  

When you miss a payment and don’t make it up promptly, it also increases the chances that your missed payment will get reported to the credit bureaus. Missing a payment can hurt your score by as much as 180 points. And if your account is eventually sent off to collections, it can take years to remove that from your credit history. 

 

2.Credit Utilization  

Many borrowers don’t understand that even if you are approved for a certain credit limit, you shouldn’t necessarily spend up to your assigned limit. For example, if you have a credit limit of $10,000 on your credit card, it’s really not a wise money move to spend that entire limit. When you do, you can rack up some pretty high interest fees over time. Plus, those excessive spending habits leave you without open credit, which can be super handy in the event of a financial emergency. 

Ideally, you should keep your credit utilization at 30% or below. This means that with a $10,000 credit limit, you should keep your balance at $3,000 or less. Doing so can help your credit score, and your credit utilization comprises 30% of your score. 

 

3. Length of Credit History  

It takes time to build credit history, so don’t expect this to happen overnight. But, the longer you have and use your credit responsibly, the more it will help your credit score. In fact, your credit history represents 15% of your overall score. 

4. Credit Mix  

Next up is your credit mix. Ultimately, this is saying that you should diversify your credit. A healthy mix might mean a mortgage or rent payment, an auto loan, a student loan, and one or two credit cards. And speaking of credit cards, though the average American has four credit cards, typically, less is better. 

Your credit mix represents 10% of your overall credit score. 

5. New Credit Inquiries  

Last but not least, let’s talk about new credit. Anytime you apply for credit, it counts as a new credit inquiry. When you apply for too many forms of credit in a short period of time, it can signal lenders that you might be taking on too much and could be at risk of making your payments on time and fulfilling your financial obligation.  

On the flip side, going for years without applying for new credit can work against you. Creditors like to see new credit applications from time to time. New credit inquiries represent the remaining 10% of your credit score.  

 

 

How Installment Loans Can Help Improve Your Credit Score  

Now, the obvious question is this—can an installment loan help you improve your credit score? The answer is yes. While we’ll talk about all the reasons why, in just a moment, we want first to express the importance of responsible borrowing.  

When you apply for an installment loan or any other form of credit, you are sending a message to the creditor or lender that you have the ability to meet your end of the financial agreement. This means that you have the ability to make your minimum monthly payments and that you have the means to pay off the financial obligation when it comes due.  

With that understanding in place, let’s talk specifically about how an installment loan can help improve your credit score.  

  1. Builds a Positive Payment History: Making on-time payments sends a positive signal to your installment loan lender, and ultimately other future lenders and creditors, that you are a responsible borrower. 
  2. Improves Your Credit Mix: If you already have a credit card and an auto loan, an installment loan can help round out your mix and give you experience with another form of lending.
  3. Creates a Longer Credit History: Installment loans are typically long-term, which can help you build that credit history over time. 
  4. Lowers Your Credit Utilization: One very popular use for installment loans is to help consolidate other financial obligations that you might have. For example, if you have high balances on multiple credit cards, consolidating those balances into an installment loan can lower that overall utilization and help you save money in interest. 
  5. Demonstrating Responsible Borrowing: When you successfully manage your installment loan, your lender will take note. And eventually, responsible borrowing will help improve your credit score over time.