Your credit score plays an important role in your overall financial health. Lenders use credit scores to determine interest rates and make approval decisions for various financial products.

Many consumers are in the dark when it comes to understanding how their credit score is calculated. One of the easiest things that you can do to improve your credit score is to apply for an installment loan and make timely payments.

Expand Your Credit History

Credit history is one factor that is used to help determine your credit score. The credit bureaus want to see that you have a positive track record when it comes to managing debt responsibly and making payments on time.

An installment loan is a sum of money that is borrowed and then repaid via regular monthly payments, or installments. Having an installment loan on your credit report is the best way to show the credit bureaus that you are capable of managing debt.

The more on-time payments you make toward an installment loan, the better your credit score will become.

Broaden Your Credit Mix

Another factor that credit bureaus like to use when calculating credit scores is something known as a credit mix. The advanced algorithms used by the credit bureaus look not only at credit history but at the types of accounts that you have on your credit reports. The more varied the account types are, the higher your score will be.

Many people have a lot of credit card debt, which is revolving debt. Adding an installment loan can broaden your credit mix if you primarily have revolving accounts. This helps to improve your credit score over time.

Lower Your Credit Utilization Ratio

Credit bureaus can identify the amount of credit you have available, as well as the percentage of this credit availability that is outstanding. This percentage is referred to as your credit utilization ratio. Ideally, you want your credit utilization ratio to stay below 30%.

Obtaining an installment loan that allows you to pay down the balance on some of your revolving accounts to lower your credit utilization ratio can boost your credit score quickly.

Just be sure that you don't let the balances on your revolving accounts start to creep up again after using an installment loan, or your credit score could drop significantly.

Installment loans are simple and useful tools that you can rely on to help you improve your credit score in the future.

For more information, contact a company like Ardmore  Finance.