Can Taking Out a Loan Improve My Credit Score?
For many Filipinos, establishing and maintaining a good credit score [...]
For many Filipinos, establishing and maintaining a good credit score is becoming increasingly important. Whether you’re applying for a credit card, housing loan, or personal loan, your creditworthiness plays a major role in determining your chances of approval. One common question that many borrowers ask is: Can taking out a loan actually help improve my credit score? The short answer is yes — but only if you manage the loan responsibly. Let’s dive deeper into how loans can affect your credit score and what you need to know to use loans to your advantage.
Understanding Credit Scores in the Philippines
A credit score is a numerical representation of your creditworthiness. It reflects how well you have managed debts in the past and helps lenders assess the risk of lending you money. In the Philippines, the Credit Information Corporation (CIC) consolidates credit data from various financial institutions to create credit reports for individual borrowers. Banks, lending companies, and other financial institutions can access these reports when evaluating loan applications.
How Loans Affect Your Credit Score
When you take out a loan, the way you manage it will directly impact your credit score. Here are some ways a loan can either boost or hurt your credit standing.
Positive Impacts of Taking Out a Loan
1. Establishes Your Credit History
If you’ve never taken out a loan or used a credit card, lenders have no way to assess your borrowing behavior. Taking out your first loan and making timely payments helps establish your credit history, showing lenders that you’re capable of managing debt responsibly.
2. Builds a Track Record of On-Time Payments
Payment history is one of the most important factors affecting your credit score. Each time you make a loan payment on time, it gets recorded in your credit report, helping to gradually improve your credit rating.
3. Diversifies Your Credit Mix
Having different types of credit accounts — such as credit cards, personal loans, and car loans — shows lenders that you can handle multiple forms of credit responsibly. This variety can positively influence your credit score.
4. Helps With Debt Consolidation
Some Filipinos use personal loans to consolidate high-interest credit card debt. By paying off credit cards with a lower-interest personal loan, you may reduce your overall interest expenses and make your debt more manageable. If you consistently make your new loan payments on time, your credit score can improve over time.
Risks of Taking Out a Loan to Improve Your Credit Score
While loans can help improve your credit score, they can also hurt it if not managed properly. Here are some risks to be aware of:
1. Late or Missed Payments
Missing even one payment can negatively impact your credit score. Lenders report payment behavior to the credit bureau, and late payments indicate a higher risk to future lenders.
2. Borrowing More Than You Can Afford
Taking out a loan that’s larger than what you can comfortably repay can lead to financial stress and missed payments. This can cause your credit score to drop and make it harder to qualify for future loans.
3. Applying for Too Many Loans
Each time you apply for a loan, the lender checks your credit report, which creates a hard inquiry. Too many hard inquiries in a short period may lower your credit score, as it could indicate financial distress.
4. Higher Debt-to-Income Ratio
Lenders also look at your debt-to-income ratio, or how much of your monthly income goes toward debt repayments. Taking on too much debt relative to your income can be seen as a red flag and could hurt your credit score.
Best Practices When Using Loans to Build Credit
If you want to use loans to improve your credit score, it’s essential to be strategic and responsible. Here are some best practices to follow:
1. Borrow Only What You Need
Avoid borrowing more money than necessary. Stick to an amount that fits comfortably within your budget to avoid repayment issues.
2. Make Payments on Time
This cannot be emphasized enough. Making on-time payments is the most effective way to build and maintain a good credit score.
3. Choose the Right Type of Loan
Choose a loan that fits your purpose and financial situation. For example, a small personal loan may be a good way to start building credit, while larger loans like housing loans should only be taken if you’re financially prepared.
4. Limit New Credit Applications
Applying for multiple loans or credit cards within a short time frame can lower your credit score. Only apply for credit when you genuinely need it.
5. Monitor Your Credit Report
Regularly check your credit report to ensure all information is accurate. Report any errors to the credit bureau to prevent mistakes from negatively affecting your credit score.
Loans That Can Help Build Credit
If you’re looking to build or improve your credit score, consider these types of loans:
1. Personal Loans
Personal loans are versatile and can be used for almost any purpose. As long as you make timely payments, a personal loan can help establish a positive credit history.
2. Salary Loans
Salary loans offered by banks, employers, or cooperatives can also help build credit if payments are made on time.
3. Secured Loans
Secured loans, such as car loans or housing loans, often come with lower interest rates and larger amounts. Successfully managing a secured loan can significantly improve your credit score.
4. Government Loans
Government agencies like Pag-IBIG, SSS, and GSIS offer loans to their members. Making consistent, on-time payments can contribute positively to your credit profile.
Final Thoughts
Taking out a loan can definitely help build or improve your credit score, but only if you manage it responsibly. Whether you’re a first-time borrower trying to establish credit or someone looking to improve your existing score, timely payments, responsible borrowing, and careful planning are essential.
Before applying for any loan, assess your current finances, understand the terms of the loan, and make sure you’re confident in your ability to repay. Remember, improving your credit score is a long-term process that requires consistency and smart financial management.
