Can a Secured Loan Help Boost Someone’s Credit Score?
When someone has a less-than-perfect credit score, it can be harder to borrow money. But managing credit responsibly is an important way to build one’s credit score. If someone with problems in their credit history needs to borrow money, one possible option could be to apply for what’s called a secured loan.
Keep reading to learn more about what a secured loan is and how using one responsibly may help applicants raise their credit scores.
What is a secured loan?
A secured loan is a loan that requires collateral. Collateral is something of value that the borrower has, like a home, vehicle or bank account. If the borrower defaults on their payments, the lender may claim the collateral to recover the loss.
When applying for a loan, lenders typically evaluate applicants using criteria such as their credit history, income and existing debt — all factors that can indicate whether they’ll be able to repay the loan. For secured loans, the lender may rely less on the borrower’s past credit history or income because the collateral reduces the lender’s risk of losing money on the loan.
How is credit history established?
A person’s credit history is a record of their experience with credit. It typically includes a list of their credit accounts, whether they make their payments on time, how much debt they’re carrying at a given time and other factors. Credit history is what lenders see when they view someone’s credit report, and it’s what determines a person’s credit score.
The following types of credit may appear on someone’s credit history:
● Credit cards
● Mortgages
● Vehicle loans
● Student loans
● Personal loans
● Home equity loans
● Home equity lines of credit
● Some types of bills
It’s important to always use credit responsibly. Mistakes like missing payments, maxing out credit cards, letting bills go to collections or applying for too much credit at once can negatively affect a person’s credit score for years.
How a secured loan can help build a stronger credit score
A secured loan can be useful for a first-time borrower or someone trying to rebuild their credit score because it provides them with the opportunity to demonstrate good financial management.
Once approved for a secured loan, the borrower should make sure they make their monthly payments on time, every time, for the full duration of the loan. Otherwise, they risk compromising their credit score even further and potentially losing their collateral.
Because of that risk, it’s not a good idea for a borrower to take out a loan if they don’t actually need the money, just for the sake of rebuilding their credit score. They might consider other ways of rebuilding their credit score instead, such as paying down high credit card balances, catching up with past-due bills or consolidating debt.
The bottom line
Taking out a secured loan isn’t a quick fix for a troubled credit score. It takes time and diligence to build a strong credit history. But with patience and discipline, borrowers may be able to use a secured loan to help them improve their creditworthiness.
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About OneMain Financial
OneMain Financial is the leader in offering nonprime customers responsible access to credit and is dedicated to improving the financial well-being of hardworking Americans.
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