If you’re in need of financial assistance and want to improve your credit score at the same time, then an unsecured loan can be an option worth considering. Do note, however, that any loan has the potential to both hurt and help your credit score.

Whether an unsecured loan affects your credit score in a good or bad way hinges on your ability to manage credit. In this article, we’ll explore the impact of unsecured loans on your score, as well as some tips for properly managing your credit.

What Is An Unsecured Loan?

An unsecured loan is a type of loan that is not backed by any collateral, such as a car or a house. Instead, a lender will your creditworthiness as a borrower as the primary factor to whether to approve the loan and at what interest rate. However, because unsecured loans are not backed by collateral, they typically have higher interest rates and stricter lending criteria compared to secured loans.

How An Unsecured Loan Can Affect Your Credit Score

When you apply for an unsecured loan, the lender will review your credit report and credit score to determine your creditworthiness. This process is called a “hard inquiry,” and it can have a negative effect on your credit score initially.

However, once you’re approved for an unsecured loan, it can impact your credit score in a number of ways. Including:

• Payment history. As with any loan, your payment history will be a key factor in determining your credit score. If you make timely payments on your unsecured loan, your credit score will improve. Conversely, if you miss payments or default on the loan, your credit score will suffer.

• Credit utilization. Credit utilization is the amount of credit you are using compared to the amount of credit available to you. It is generally recommended to keep your credit utilization below 30% to maintain a good credit score. If you take out an unsecured loan and use a significant portion of your available credit, it could impact your credit score negatively.

• Length of credit history. The longer you have a credit history, the more information lenders have to evaluate your creditworthiness. Taking out an unsecured loan can potentially increase the length of your credit history, which could have a positive impact on your credit score. However, if you have a short credit history, an unsecured loan may not have as much of an impact on your credit score.

• Credit mix. Credit mix refers to the different types of credit accounts you have, such as credit cards, mortgages, and loans. Having a diverse mix of credit accounts can be seen as a positive by lenders, as it shows that you are able to handle different types of credit responsibly. However, the impact of credit mix on your credit score is relatively small, only accounting for 10% of your score.

How To Manage Your Credit When Taking Out An Unsecured Loan

If you are considering taking out an unsecured loan, there are a few steps you can take to minimize the impact on your credit score and maximize your chances of approval:

• Shop around. It is a good idea to shop around and compare offers from multiple lenders to find the best deal. Keep in mind that each hard inquiry can impact your credit score, so try to limit the number of lenders you apply with.

• Keep your credit utilization low. As mentioned earlier, credit utilization is an important factor in determining your credit score. To avoid negatively impacting your credit score, try to keep your credit utilization below 30% when taking out an unsecured loan.

• Make timely payments. As with any loan, making timely payments is crucial for maintaining a good credit score. Set up automatic payments or reminders to ensure you never miss a payment on your unsecured loan.

• Use a credit-builder loan. If you have a limited credit history or a low credit score, you may want to consider a credit-builder loan. These loans are specifically designed to help individuals build or improve their credit. They typically have smaller loan amounts and require the borrower to make regular, on-time payments over time.

The Bottom Line

it’s important to carefully consider the pros and cons of taking out an unsecured loan and to only borrow what you can afford to pay back. By managing your credit responsibly, you can potentially improve your credit score over time.

Luckily, there are a variety of ways you can improve your credit score. One of these is credit restoration, the process of removing negative information from your credit report. Call us at 888-799-7267 to schedule a Free Credit Consultation.