Boost Your Credit Score with Personal Loans

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

A good credit score is crucial to be able to borrow money whether the amount or the interest rate. But, there may be times where your credit score is low for reasons beyond your control. Having been in that situation, I used a personal loan to slowly, but surely build up credit history and credit score.

Updated January 3, 2025.

Key Points:

• Household bills even if paid timely, won’t affect your credit score.
• When possible, use your credit card to pay household bills such as your utility bill each month.
• Some states are beginning to give credit for rent payments to reflect on credit reports.

What is a Personal Loan versus a Credit Card

A personal loan is different from a credit card because a credit card is known as revolving credit. In contrast, personal loans are known as installment loans because there is a fixed payment amount for a certain period of time. For example, a credit card balance will increase when you use it, while a personal loan is given to you as a lump sum payment, and you make the predetermined payments while the funds are used accordingly.

In a prior post, I referenced how I got a personal loan to pay for my garage. I could have used my credit card for the payment, but installment loans are harder to get than credit cards, especially for high amounts. In my case, the bank transferred the funds to my personal account, and I used the funds to pay the garage company. Everybody wins, and I finally get my mancave.

Since installment loans can be more difficult to get, when possible, I’ll get a personal loan to pay for debts that I’m not getting any credit for or that are not listed on my credit report.

For example, every month, I pay the Internal Revenue Service (IRS) online my taxes, but I do so with my credit card. If I just paid the IRS with my checking account, that would have zero effect on my credit score, yet it’s still debt. However, my credit score will continue to increase by making my monthly payments with my credit card and then paying off that amount by the end of the month.

A Good Credit Score Depends on Your Credit Utilization Ratio

Because I’ve been using this system successfully for decades, the credit card companies continue increasing my maximum balance. Last week, I received notice of another $3,500 increase for one of my credit cards. The bigger the gap between what is owed and the maximum balance, the better your credit score. That is known as the credit utilization ratio, and it’s best to have it at 30% or less. You can read more about the credit utilization ratio via my prior post below.

• How I Used a Personal Loan to Improve My Credit Score

Because of this, I have already received notice from Credit Karma of the substantial increase in my credit score this year. You can see that email below and the main photo for this blog post is the first half of that email.

Note that paying with credit cards does typically result in an additional fee. With the IRS, I pay approximately three dollars more, but for me, the extra $40 a year is worth it, especially since most of my income is self-employment income, and that generally is an issue with lenders since income is harder to prove compared to a W2 employee.

The same tactic I use with my credit cards can also be used with personal loans. I’ve mentioned before that I got personal loans during the coronavirus pandemic, and the last loan is to be paid off in August of this year.  Once I pay off that loan, I will get a new loan to pay off my taxes. Of course, this assumes that I get a favorable deal on the interest rate to make it worthwhile.

The interest rate should be close to or comparable to the interest I am paying on my outstanding taxes. The reason is that you want to avoid going deeper into debt by paying more in interest.

I tried logging into the IRS.gov website this morning to see what my interest rate was, but considering we are in tax season, I couldn’t access my account fully. There even was a short delay logging in where there were 841 people ahead of me, and once I was logged in a few moments later, account access was restricted. But because it’s tax season, everyone is checking up on their IRS tax refund. I did write a blog post on tax refunds and bankruptcy that you should read and can find below.

• It’s Tax Season and the Taxman and Trustee Want your Taxes

If you haven’t set up with the IRS their new method of verification Id.Me, you will have to, and it requires having your driver’s license ready, including taking a selfie with your cell phone or webcam. More information can be found on the IRS.gov website by clicking here.

Now, let’s say the numbers add up, meaning the interest rate the IRS is charging me versus the interest rate charged on a personal loan, then I’ll get the personal loan to pay off the IRS since I might as well get “credit” no pun intended, for paying my taxes.

Remember, not all debt is reported to the three major credit bureaus: Equifax, Experian, and TransUnion. So, the debt that isn’t reported and you’re making timely payments on has no effect on your credit report or score. In the past, I’ve had divorced clients wondering why they could not qualify for a rental if they paid all their bills timely, but most bills aren’t reported to credit bureaus.

For example, your utility bill is not listed in your credit report, but a utility company will review your credit report to determine how much should be your deposit to open a new account. Of course, while you don’t get “credit” for paying your utility bill timely, but don’t pay and see how fast it ends up on your credit report.

So, most bills you pay with your checking account usually won’t result in receiving credit on your credit report. This is why I pay my utility bill with my credit card and then pay it off at the end of the month.

This also means the monthly usage on my credit cards is very high, but it’s nothing more than most of my regular household expenses. So, I will pay any bill with my credit card, such as my cell phone bill. I used to love it when renting office space from a large corporation that required me to make my rent payments online since it was $2,500 each month tacked on to my credit cards. This ended up in endless reward points, and I took advantage of plenty of free hotel stays, especially in the Florida Keys and Key West.

It is time to daydream for a second as I remember all my motorcycle rides down the Overseas Highway and walks down Duval Street after a delicious seafood meal while having a cigar and enjoying a Pirate’s Punch from Captain Tony’s.

Okay, I’m back!

The good news, and it’s about time, is that some states are allowing your monthly rent payments to go toward your credit score. That only makes sense. Imagine, if you don’t pay your rent timely and you get evicted, chances are that goes on your credit report, making it more difficult to rent somewhere else and likely the landlord asking for a larger deposit.

But if you made payments timely for ten years, what did you get on your credit report? Nothing. Not fair and definitely not logical. Unfortunately, the credit scoring system isn’t perfect, but it’s all we have, and we have to learn the rules and tricks of the trade to our advantage.

Other types of debts that aren’t reported to the credit bureaus, such as government taxes, which I already mentioned, include debts for professional services such as a lawyer or dentist. So, if you are paying your dentist for monthly treatments, you might as well pay for it with your credit card. However, make sure you aren’t wasting money by paying interest as well.

Of course, there are some benefits to having unreported debt, such as less debt on your credit report, which should mean a higher credit utilization ratio.

So keep in mind that if the opportunity arises to use debt reported to the credit bureaus to pay off unreported debt, as long as the numbers make sense, consider applying for a personal loan to help improve your credit score! No point in losing or giving points away on your credit report, especially since you never know when an emergency may present itself, and you need quick access to a loan.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link. You can also listen to my podcast on Spotify.

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