Do Installment Loans Hurt Your Credit Score?

Find out how installment loans can help improve your credit score and what factors to consider when applying for one.

Do Installment Loans Hurt Your Credit Score?

Installment loans can be a great way to improve your credit score, as long as you make your payments on time. Credit bureaus understand that loan balances will be high at the beginning of its useful life, so they forgive large loan balances. Switching credit card debt to an installment loan can lower your credit utilization ratio, which is an important factor in your credit rating. Paying off an installment loan can hurt your short-term credit, as it may reduce your combination of credit accounts and close an active account.

However, it may be easier to budget for installment loans, as monthly payments are predictable. As long as you make scheduled monthly installment loan payments on time, your credit score will improve. An installment loan and how you use it could have an impact on your credit ratings. Your credit ratings could also have an impact on your installment loan, as lenders consider your scores when deciding whether to offer you a loan.

Your credit score may also influence interest rates and the terms offered to you. Buy Now and Pay Later Loans allow you to spread your payments over a few installments, instead of paying what you buy right away. Making a loan application may affect your credit if the company extracts your credit information to approve your application. So, while it may not hurt your score too much, remember that you will repay the loan until it is paid off.

Don't forget that it's also helpful to review your credit report after you've received the loan. You can also use a free service such as Credit Karma or Credit Sesame to see how your installment plan is reported. Even so, it can hurt your credit score if it is included in collections that are reported to credit bureaus, regardless of the lender. An installment loan is a type of credit that is amortized in fixed payments, usually on a monthly basis, for a set repayment period.