How Loans Can Improve Credit
Individuals who have had credit problems in the past know how
much of a hassle it can be to try and get a loan with bad
credit. It can be worth all of the trouble, though... after all,
not only are you getting the loan that you need but you're also
being given an excellent opportunity to improve your credit
rating for the future!
What many people don't realize is that by making regular
payments on a loan, they're doing a lot to set up an improved
credit score down the line... after all, each loan payment
that's made on time can be a positive report to credit agencies
from your lender.
To better understand exactly how the process of a loan improving
your credit score works, it's important to make sure that you
understand exactly how your credit score is figured in the first
place.
Credit Reporting and Your Credit Score
Every time a payment due date arrives, there is the potential
for either a positive report or a negative report being sent in
from the lender or business to the various credit reporting
agencies. If you've made your payments on time and everything
else is in order, then the creditor sends a positive report and
the value of it is added to your credit score.
On the other hand, if you fail to make your required payments on
time then a negative report will be sent and the value of it
will be subtracted from your credit score.
While one individual report usually isn't enough to make a major
change in your credit score, having multiple positive or
negative reports sent in consecutive months can begin to have an
effect on your score.
Effects of Time
As time goes by, individual reports on your credit record expire
and are removed... this prevents old negative reports dragging
down the credit score of someone who's had nothing but positive
reports in the years following the initial payment problems.
The amount of time that passes before a negative report expires
can vary depending upon the credit reporting agency as well as
other factors. If you've obtained a loan while you have bad
credit and you make all of your payments on time, you might not
notice a sudden drastic improvement in your credit score...
though by the end of the loan term you may begin to notice at
least some improvement.
Once a bit more time has passed and your older negative reports
have started to expire, though, you may begin to notice
unexpected jumps in your score; this is due to your score being
recalculated without the old negative reports to drag it down,
and with all of the newer positive reports increasing the total
score.
Credit Improvement
Obviously, getting a loan and making all of your payments on
time can serve to improve your credit rating... it's simply a
matter of understanding the process of computing your credit
score.
Your score is recalculated every time a new report is made or
when an old report expires, meaning that if the lender you've
chosen for your loan reports monthly then you could have an
updated credit score every month.
As you continue to get positive reports and they begin to
outnumber the negative, your score will begin to rise... and you
will be on your way to a bright future with a good credit
rating.
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