What Kind of Loans Will Improve Credit the Most?

Consumers looking to improve their credit scores have a range of options. Beyond the standard tools such as on-time payments, amount of credit utilization and length of credit history, specific types of loans will improve scores the most. Part of this depends on individual circumstances; the kind of loan generally matters little to people who have and maintain pristine credit histories, while those with low scores can benefit the most from such loans. As always, discipline and consistency remain paramount considerations.

Mortgage Loans

A mortgage loan can demonstrate stability as well as equity that accumulates each month, key factors looked at by potential creditors and reflected in credit scores. Those consumers who borrowed to the absolute limit or overpaid for homes are susceptible to missed payments and foreclosure without an adequate financial cushion, which makes it essential to have sufficient equity (at least 20 percent) and steady income to cover payments.

Automobile Loans

You generally take out automobile loans for terms of 36 to 60 months. Rather than put a large down payment on the car of your dreams, which creditors do not see, take out a larger loan than necessary and make higher payments than required each month. This will quickly reduce the balance versus the original amount, which improves a credit score faster than making the minimum payments on a smaller loan and taking longer to pay off the principal balance.

Loan Types

Your scores drag lower if you have only credit cards or concentrations in just one type of loan. Consumers who maintain a mix of loan categories will fare the best when trying to improve their credit. These include installment and fixed-payment loans, credit cards and secured loans such as for homes and cars. Creditors and the major credit-rating agencies look favorably on this kind of variety provided as always that they are managed responsibly.

Lines of Credit and Credit Cards

These loans types can quickly improve scores in the short-term, but only if their credit utilization remains low. For consumers who may not have the discipline to avoid overspending, high balances compared to credit lines will measurably dampen scores. However, those who limit their usage and keep balances to under 25 percent of available credit will demonstrate to creditors that they do not need the credit at their disposal, representing a good credit risk that leads to higher scores.