Can a small signature loan from my bank improve my credit rating?

Yes, a small signature loan from a bank can improve your credit rating.

I assume the following definition of a signature loan:

A loan for which no collateral is pledged.

That is, a signature loan is backed by nothing more than your signature. It is an unsecured loan.

The advantages:

If you have little or no payment history, a signature loan will give you an opportunity to build payment history. 35% of your Fair Isaac (FICO) score concerns payment history: are you able to pay off a balance within the terms of your loan contract? To score the most points - and thus get the highest credit rating, you must make payments on time, every time. If you have little credit history, 24 consecutive monthly loan payments without a miss will do you the most good.

The disadvantages:

(1) A signature loan is considered a personal finance loan, which is slightly derogatory to a FICO score. Taking out such a loan says that even for everday expenses, you%26#039;re spending beyond your means. 10% of your FICO score is for credit mix: what types of credit are you using? The good types are: secured loans, such as a mortgage or auto loan, major credit card (Visa, MC, AmEx, Discover) and retail store credit card. The bad types are payday loans, signature/unsecured installment loans and checking account overdraft loans.

(2) You%26#039;ll pay a high rate of interest to improve your credit score. An interest rate of 19% and higher is not unusual for an unsecured loan. This is a high price to pay to establish credit, plus there are costs just to open the loan. A credit union might give you better rates than a bank or a finance company.

(3) No matter what kind of credit you choose, you%26#039;ll be subject to a hard inquiry of your credit history. This inquiry will cost you a few FICO points temporarily (10% of your FICO score is for inquiries involving new accounts), but you%26#039;ll get them back within one year. The inquiry will remain in your records for another year and then be deleted from your records.

Do not make the loan for more than $500, and make it for 2 - 3 years to keep costs down and give yourself a chance to build history.

The least expensive way to accomplish good credit history might be with a credit card. If you make a small NECESSARY purchase (gasoline, groceries, a utility bill on auto-pay on the credit card) every month and pay off the bill in full every month, you%26#039;ll pay no interest. If you can%26#039;t get an unsecured card (no annual fees, no security deposit), get a secured one that doesn%26#039;t report to the 3 credit reporting agencies (CRAs) as a secured card. Be careful to learn ALL fees BEFORE you sign up for a credit card: initiation fee for opening the account, fee for activating the card, monthly maintenance fee, annual fee. Read the Terms and Conditions (the fine print) carefully, and ask questions. If you are a student, look at offers for student credit cards.

You can compare rates at a site like http://www.bankrate.com

No matter which kind of credit card you get, do not allow your balance to go higher than 30% of your credit limit. For example, if your credit limit is $700, do not allow a balance of more than $210, which is 30% of the $700 credit limit. If your balance is higher, you%26#039;ll hurt your score.

No matter whether you choose a signature loan or a credit card, ask the lender and make sure the lender reports to all 3 CRAs: you want to build history with all 3 of them. If the lender doesn%26#039;t report to all 3, look for a lender that does.

I have no financial or legal interest in any of the companies mentioned.

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Can a small signature loan from my bank improve my credit rating?

Yes as long as you pay it off and pay on time all the time until you do.

Can a small signature loan from my bank improve my credit rating?

Anytime you pay your bills on time and manage your credit properly the rating improves. They look at many things besides payment history when computing your rating. Amount of credit you have past history, credit applications, job and maritial status just to name a few.