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- I took out a two-year $2,000 personal loan with the sole purpose of improving my credit score.
- I deposited the loan money into a separate account to make sure I didn’t touch it, which prevented me from spending recklessly.
- By setting up automatic monthly withdrawals from that account, I made all payments on time for two years.
In college, my goal was to stay debt free. I avoided taking out student loans by attending the school that offered me the best scholarship. In my mind, finances were black and white. Loans and debts were just bad.
When I graduated, I knew it was time to start building credit. I needed strong credit if I wanted to move out of my parents’ house, get a good credit card, and buy a house one day.
So I did something I swore I’d never do: I took out a personal loan.
Making my personal loan work for me
I had avoided loans for a good reason: I didn’t want to go into debt. However, I learned that if I strategized, a personal loan could actually work in my favor.
I requested a personal loan from my bank. I thought about getting a loan with a one-year term because I didn’t want the debt hanging over my head. However, after talking to my father, as well as a banker, I got a loan of $2,000 with a two-year term. Consistently making on-time payments on a long-term loan would show greater reliability and help my credit score.
Right after college, some of my friends decided to improve their credit scores by applying for starter credit cards. They thought this was the perfect time to make a big purchase, like a TV or couch. Others bought groceries or gas with their cards and paid them off immediately to build credit.
Choosing a personal loan versus a credit card required less work on my part. It also kept me from going further into debt – and looking at my 22-year-old self, I definitely would have gone into credit card debt.
When I got a loan, I opened a new bank account so I could keep the loan money in a separate place. That way, I wouldn’t be tempted to touch the money. Then, I set up automatic monthly withdrawals from that account so I never miss a payment.
As a result, all I ever paid on this loan was accrued interest. Thankfully, my father agreed to be my author. He had excellent credit, which helped me get one of the best personal loan rates at the time – just under 7%. That means I paid about $150 over two years to improve my credit score. But considering that a better credit score helped me get lower rates on other types of loans later, the 7% interest was worth the cost.
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How a personal loan helped me in the long run
Before I paid off my personal loan, my credit score was “good,” which is the definition of a FICO score between 670 and 739. When I was a kid, my dad added me as an authorized user on one of his credit cards, and since he never missed a payment, I ended up with a good score.
(Fun fact: My dad completely forgot he ever made me an authorized user, so that was a nice surprise when we visited the bank to apply for my loan!)
At the end of two years, my score was in the upper 700s, or “very good” by FICO standards. So was that two-year personal loan worth it? What did going from “good” to “very good” do for me?
It gave me options.
As your credit score increases, you may qualify for better and better credit cards. With a “very good” score, I didn’t have to settle for just any credit card—I had my pick of the best credit cards. I applied and was approved for one of the best Chase credit cards that offered a variety of travel benefits, which at the time included a sign-up bonus. (Depending on when you apply, Chase credit card bonuses may be even higher than they were at the time.)
Not only did I qualify for this card, but a very good credit score helped me secure relatively low interest rates. Whenever I haven’t been able to pay off the full statement balance over the years, interest has accrued, but the lower interest rate has translated into my lower payment in the long run.
A very good point also gives me options for where I live. Between my husband’s job and graduate school, we’ve moved frequently over the past six years. Every time we moved, we had to apply to live in a new apartment. Thanks to my strong score, getting approved for an apartment wasn’t too difficult.
In 2022, my husband and I finally achieved our goal of buying our first home. Not only did our high credit scores help us get approved for a mortgage—they also helped us snag a relatively low 30-year mortgage rate and low private mortgage insurance costs. The $150 I paid in interest on my personal loan will ultimately save me tens of thousands of dollars on my mortgage.
At first I was worried that getting a personal loan would complicate my life. However, being strategic about my credit has actually made my life easier for almost a full decade.
This article was originally published in May 2023.