I took out a $2,000 personal loan even though I didn’t need the money, and it bumped my credit score from “good” to “very good”

I took out a $2,000 personal loan even though I didn’t need the money, and it bumped my credit score from “good” to “very good”

woman writing

In college, I worked hard to stay out of debt. I avoided taking out student loans by attending the school that offered me the best scholarship. In my mind, finances were black and white. Loans and debt were just plain bad.

When I graduated, I knew it was time to start building credit. If I wanted to move out of my parents’ house, get a good credit card, and buy a home one day, I needed strong credit.

So, I did something I swore I’d never do: I took out a personal loan. I was officially in debt for the first time.

Making my personal loan work for me

I’d been avoiding loans for a good reason: I didn’t want to go into debt. But I learned that if I strategized, a personal loan could actually work in my favor.

I requested a personal loan from my bank. I considered taking out a loan with a one-year term, because I didn’t want debt hanging over my head. However, after talking with my father, as well as a banker, I landed on a $2,000 loan with a two-year term. Consistently making payments on time for a longer-term loan would demonstrate greater reliability and help my credit score.

Straight out of college, several of my friends decided to improve their credit scores by applying for credit cards. They figured this was the perfect time to make a big purchase, like a TV or couch. Others bought groceries or gas with their cards and paid them off immediately to build credit.

Taking out a personal loan rather than getting a credit card required less work on my part. It also prevented me from going further into debt – and looking back at my 22-year-old self, I definitely would have gone into credit card debt.

When I took out a personal loan, I opened a new bank account for the express purpose of keeping the loan money in a separate place. This way, I wouldn’t be tempted to touch the money. Then, I set up automatic monthly withdrawals from that account so that I’d never miss a payment.

As a result, all I ever actually paid on this loan was the interest that accrued. Thankfully, my dad agreed to be my cosigner. He had excellent credit, which helped me snag a low interest rate – just under 7%.

How a personal loan helped me in the long run

Before I paid off the personal loan, my credit score was “good,” which is FICO’s designation for credit scores between 670 and 739. When I was a kid, my dad made me an authorized user on one of his credit cards and since he never missed a payment, I ended up with a good score.

At the end of two years, my score was in the upper-700s, or “very good” by FICO standards. So, was that two-year personal loan worth it? What did going from “good” to “very good” get me?

It gave me options.

As your credit score increases, you can qualify for increasingly better credit cards. With a “very good” score, I didn’t have to settle for just any credit card – I had my pick of cards. I applied and was approved for the Chase Sapphire Preferred card, which offered a ton of travel benefits, including a sign-up bonus of 60,000 travel points.

Not only did I qualify for this card, but a very good credit score has helped me secure relatively low interest rates. When I’ve been unable to pay the full statement balance on occasion, interest has accumulated, but the lower interest rate has translated to my paying less in the long run.

A very good score also gives me options about where I live. Between my husband’s job and graduate school, we’ve moved frequently over the last five years. Each time we move, we have to apply to live in a new apartment. Thanks to my strong score, I’ve never had to worry about whether or not I’ll be approved to live in a new place.

My husband and I would like to buy a home in the next few years. As long as we keep our credit scores high, we hope to get a decent interest rate on our mortgage.

Initially, I worried that taking out a personal loan would complicate my life. However, being strategic about my loan has actually made my life easier.

[“source=businessinsider”]