Improve Your Credit Score
By Paying Back A Loan

how it works

What if we told you that paying back a personal loan could help you boost rather than reduce your credit standing? No, it’s not just wishful thinking; it’s an amazing financial trick that helps you add some padding to your credit score without bogging down your monthly income. Eliminate excess debt, build up your credit score, and improve your chances of getting approved for a future loan by simply making your monthly payments.

 

So will paying off a loan improve credit and increase financial freedom? It depends. If you’re looking for how to improve your credit score in the most holistic and straightforward way possible, this blog post is for you.

 

Let’s explore all the ways that paying back a loan can actually improve your credit score, including:

 

  • How loans affect your credit score

  • How to increase your credit score with loans

  • Boosting credit scores with a loan: watching for pitfalls

  • How to pay off loans fast with Salt and Lime

How does a personal loan affect your credit score?

Before we talk about the impact of a loan on your credit score, let’s discuss what credit scores actually measure in the first place.

 

Credit is the culmination of your debt to income ratio, repayment history, credit length, current portfolio, and loan inquiries. Although there are many other factors that determine the final number, your score is primarily impacted by the above five elements. And almost a tenth of your score is controlled by a double-edged sword: new credit inquiries.

 

Applying for any kind of loan will place a ‘hard inquiry’ on your credit report, which amounts to 10% of your total score. Each inquiry will reduce your score by roughly five points, although this number may be higher or lower depending on certain elements. As you shop around for a loan that meets your needs, hard inquiries can start to add up quickly. Within the span of a few weeks, your credit score may look significantly smaller than it did before. This is one of the reasons why it's so important to choose a loan you want ahead of time. Many Australians inadvertently damage their credit scores by putting in multiple loan applications, then just selecting the one they like the best once multiple outlets approve them. 

 

Thankfully, the story doesn’t end here. Hard inquiries only show on your credit report for two years, and stop impacting the score after just 12 months

 

Regular repayments will not start affecting your credit score right away, but it will certainly start making improvements within a year or less. If you are consistently paying the same amount each period and meeting every repayment deadline, your credit score may be able to dramatically increase. Some people have seen improvements of up to 100 points within 12 months, moving their score from fair to excellent. While your mileage may vary, long-term determination and consistency will dramatically elevate your current credit score.

How to increase your credit score with loans

There are five easy steps you can take today to build a great credit score via personal loans. Let’s take a look at each step in greater detail.

1. Take stock of all your loans

It’s important to understand how much you currently owe, and which companies are expecting what amount of money. List them all out on a sheet of paper, starting with the highest loan first and ending with the smallest loan.

2. Consider debt consolidation

If the debts you owe are less than 50% of your combined household income, debt consolidation loans could help to alleviate the pressure associated with higher interest rates. In addition, rolling your debts into a single place removes the guesswork of monthly payments, reduces costs by eliminating multiple interest rates, and increases the speed at which you can pay off debt.

3. Create a monthly budget

How much do you make per month, and how much are you paying for other things? This will help you to be much more intentional about the repayment process. Be sure to add space for the bare minimum of repayments and leave room to increase the limit if you can.

4. Set phone reminders

Don’t let yourself forget about that bill deadline or repayment date. If possible, give yourself plenty of advance warning to make transfers without too much stress. Not comfortable with mobile phones? Try using a physical calendar instead.

5. Never miss a payment

Consistency is key. In order to build your credit score up to its fullest potential, you should aim to make every payment on or before the due date. Making multiple installations per month is a great way to meet and exceed repayment goals.

 

If you are willing to be patient, timely, and in this case, long-suffering, it’s perfectly possible to increase your credit score within 12 months or less.

Boosting credit scores with a loan:
watching for pitfalls

When it comes to building your credit score with personal debt, it’s important to be aware of any possible drawbacks before continuing. Some people may find it an easy process, while others might be leerier of the prospect. In either case, it pays to understand some of the potential snags that arise from boosting credit scores with personal loans.

 

  • Don’t take out more debt just to boost your credit score, especially if you are already struggling to pay off your current debts. 

 

  • If you cannot meet every repayment without fail, a new personal loan will probably not help your financial situation much.

 

  • Keep an eye on any loan fees that could blindside your monthly budget.


If you’re mindful of your standing, careful with your budget, and 100% dedicated to paying off your debts on time, leveraging a personal loan to boost your credit score could be a life-changing decision for you and your household. Should you already have pre-existing loans with high interest rates, a debt consolidation loan from Salt and Lime could provide the same credit-boosting effects.

Learn how to pay off loans quicker with Salt & Lime

Curious to learn more about how to pay off loans and boost your credit score? Salt and Lime can help. Browse through our other blog posts to get a better understanding of what we do and why we do it. Ready to jump in with a debt consolidation loan of your own? Use our easy online application to get the ball rolling. We can’t wait to help you make financial dreams a reality!