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Building Credit with Personal Loans

Posted September 11th, 2010
by PersonalLoans.org Staff

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If you’re just getting started out in life, and haven’t had the chance to establish any credit yet, personal loans can be the perfect way to get started. These small loans can be used for practically anything, and they typically have much lower interest rates than credit cards.

Of course, if you have no credit history, you will probably be required to offer up something of value as collateral, but that’s OK. Even if the bank doesn’t require you to offer collateral (called an unsecured loan), it’s often a better idea to go ahead and offer collateral anyway, as this will typically allow you to get a better interest rate, saving you a considerable amount of money.

Collateral is anything of value that you agree you will give to the lending institution if you fail to pay your loan back. It’s their way of making sure that they will receive something of value, even if you default on your loan. Of course, it can seem a bit scary to offer up your valuables as collateral, but the dirty little secret is this: the bank doesn’t want your stuff. They want you to repay your loan. Because of this, most banks are usually willing to work with you even if you do fall behind to avoid the need to collect on the collateral.

When you take out personal loans, start small. Make sure that the payments are really going to be within your budget. The last thing you want to do to your credit rating is default on a loan. If you are not absolutely certain you can make the payments every month, don’t take the loan. It isn’t worth the risk.

In addition to collateral, some banks require new borrowers to have a cosigner. A cosigner is someone with good credit who agrees that they will pay the loan if you don’t. Often, this is a relative. Having a good cosigner can also help you get a better rate on personal loans.

Of course, once you have received the loan, you will want to make sure that you make all payments on time or early. Credit bureaus keep records of every payment you make, and use it to determine your credit score. If you routinely make your payments ahead of time, it will reflect well on your credit score. If you are frequently late, or miss payments, it will reflect negatively on your credit score.

The credit bureaus can be your best friends, as long as you keep on top of your payments and pay attention to your credit scores to ensure that all of the information they record is accurate.

Pay off your personal loans on time, or slightly early. Don’t pay them off too early, as this may cause banks to view you as unprofitable, making them hesitant to do business with you. Do pay all loan payments before they are due, though, and soon you’ll find your credit score climbing off the charts.

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