I am going to ask this oft repeated question one more time because:

I have heard many of my friends say that the best way to increase your credit score is to take a loan ( at an interest) and then pay it over a period of time. Their main point being that you have to pay real interest on a loan to increase your score. If you use a credit card and pay in full every month (and therefore pay zero interest) your score will not improve appreciably. I highly doubt this, can you confirm or refute.

  • 1
    what for? The answers may vary depending on your rationale.
    – littleadv
    Mar 5 '12 at 9:14
  • 2
    Did you search for similar questions here before asking? Mar 5 '12 at 12:49
  • @littleadv Just want to have a higher score. It is useful, so I have heard. Mar 5 '12 at 14:55
  • @ChrisW.Rea Yes I have done some reading. But I asked this here due to #1 and to clarify #2 ( my question's above). Thanks for reading. Mar 5 '12 at 14:57
  • 3
    -1 I feel on this forum people can share their real world experiences and advice - Is a very bad reason for asking a duplicate question here.
    – user4127
    Mar 6 '12 at 13:43

If you just want to have high score because you've heard its useful, then what you need to do is be smart about your credit, and never abuse it.

Paying for money you don't need (AKA taking a loan just to boost your credit score) is not being smart. Its wasteful, and unless you need to show creditors in the very near future that you're worthy of their attention (i.e.: plan on a mortgage within a year), it is unnecessary. It is true that credit cards affect your score at a slower pace, though (in positive direction, that is).

One of the first articles I wrote on my blog was how to use your credit cards properly. Read it, if you have a credit card - doing this will help you increase your credit score. If you don't have a credit card - get one, for free. I wrote another couple of articles on this: why to get a credit card, and why you want it to be free.

  • Great ! I am going to read all three articles. Thanks a lot. Mar 5 '12 at 18:22

For some reason, we humans very deeply believe in "No pain, no gain". This, mixed with honest ignorance perpetuates myths like the loan idea you shared.

Trust me, I was actually given exactly the same idea by many people, including a member of a credit union when I was looking for options to establish my credit 6 months ago.

The only voice of sanity, and I cannot thank them enough now, were those of the very people who have answered your question and commented.

Scoring with credit cards is really simple:

  1. You take on loans through your credit cards (aka purchase stuff and pay bills)
  2. Before your creditor reports your balance to the CRAs, ensure it's in the 1 - 9% range, but NEVER 0%!
  3. Sign up for credit monitoring, often for free, and ensure your creditors are reporting correctly.
  4. Watch your score go up

The honest ignorance I was taking about is when people pay their outstanding card balance in full before their creditor reports their balance to the CRAs.

This puts their utilization in the 0% bracket - which is as bad for your score as people get who don't now how to manage credit.

Yes, it's as easy as 1-2-3.

  • How do you sign up for Credit Monitoring for free? Thanks for the honest answer. I knew in my heart that the loan advice is a myth. See point # 2 on my original question above. Mar 5 '12 at 20:08
  • "The honest ignorance I was taking about is when people pay their outstanding card balance in full before their creditor reports their balance to the CRAs." This is incorrect. As @littleadv says in the blog statement that is referred to in his answer, paying your credit card balance in full by the due date shown on the monthly statement is the best way to improve your credit rating. It doesn't matter when you pay it off in that monthly cycle; as long as it is before the due date, the CRAs get a "positive" report from the credit card company. Mar 5 '12 at 21:01
  • @DilipSarwate: The date on which the creditor reports card balance to the CRAs is usually the day your statement is generated or sometimes later, but it's always much before the due date. I am telling people to make sure they wait till their balance is reported before paying in full, and it's not contrary to what littleadv recommends. It's seems to me that you are confusing my use of the term "reported" with "sent to collections" or "reported late". My use of reported is when the lender lets the CRA know how much balance you ran up that statement cycle. Mar 6 '12 at 3:36
  • you sign up for Credit Monitoring for free from sites like Credit(Karma|Sesame), Quizzle, Equifax, DCU, etc Mar 6 '12 at 3:40
  • To f1StudentInUS and others who know - what DCU's web site? Mar 28 '12 at 20:33

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