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Laura Grace Tarpley
In college, my goal was 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. I needed strong credit if I wanted to move out of my parents' house, get a good credit card, and buy a home one day.
So, I did something I swore I'd never do: I took out a personal loan.
I'd been avoiding loans for a good reason: I didn't want to go into debt. However, 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 starter 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.
Choosing a personal loan vs. 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 loan, I opened a new bank account so I could keep 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 one of the best personal loan rates at the time — just under 7%. This meant I paid around $150 over two years to improve my credit score. But considering that a better credit score helped me land lower rates on other types of loans later, the 7% interest was well worth the cost.
Before I paid off the personal loan, my credit score was "good," which is the designation for a FICO score between 670 and 739. When I was a kid, my dad added me as an authorized user on one of his credit cards, and since he never missed a payment, I ended up with a good score.
(Fun fact: My dad completely forgot he ever made me an authorized user, so this was a nice surprise when we visited the bank to request my loan!)
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 the best credit cards. I applied and was approved for one of the best Chase credit cards that offered a ton of travel benefits, which at the time included a sign-up bonus. (Depending on when you apply, Chase's credit card bonuses might be even higher than they were back then.)
Not only did I qualify for this card, but a very good credit score has helped me secure relatively low interest rates. Any time I've been unable to pay the full statement balance over the years, 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 six years. Each time we moved, we had to apply to live in a new apartment. Thanks to my strong score, being approved for an apartment wasn't too difficult.
In 2022, my husband and I finally reached our goal of buying our first house. Not only did our high credit scores help us get approved for a mortgage — they also helped us snag a relatively low 30-year mortgage rate and low private mortgage insurance costs. The $150 I paid in interest on my personal loan will ultimately save me tens of thousands of dollars on my 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 for almost a full decade.
This article was originally published in May 2023.
