When rebuilding your credit, it's important to add as much positive information as possible to minimize the impact of the bad stuff (e.g. collection accounts, missed payments) that's pulling down your score. Although secured credit cards have been the go-to option for many people seeking to quickly improve their scores, consumer loans is another financial products that can also work wonders. Here are two ways a consumer loan can help you rebuilt your credit.

Consolidate Debt

One major area where a consumer loan can help is by letting you consolidate your debt. You can use the loan to pay off your credit cards, collection accounts, and other bills, which can improve your score in a couple of ways.

First, you can use the money to pay collection accounts and negotiate with creditors to have those accounts removed from your credit report. A well-known secret is collection agencies pay original creditors pennies on the dollar for your debt. So they will typically be amendable to making a deal with you to remove the negative report if you pay the debt because they'll make a tidy little profit out of the deal. Be sure to get the agreement in writing; otherwise, you won't have any legal recourse to fight back if the collection agency doesn't hold up their end of the deal.

Second, consolidating your debt into one loan will make it easier to stay on top of your payments, since you only have to deal with one creditor. However, don't close your credit accounts when you pay them off, as this will hurt your credit by throwing your credit utilization rate out of balance. Instead, cut up the cards or put them in a difficult to access place (e.g. safety deposit box) if you feel you don't have the willpower to avoid using them.

Establish Good Payment History

Although creditors review your credit report to determine how you've handled credit in the past, your newer activity is given priority over older stuff. So for every month you make an on-time payment on the consumer loan, the missed payments and collection accounts of take lesser and lesser priority. The credit reporting agencies also build this into their scoring model, so you're likely to see a big positive jump in your score just for getting approved for the loan and then incremental improvements each month as the account ages and you make payments as agreed.

For more information on how a consumer loan can help your credit or to apply for one, contact a local lender such as MainSource Bank.

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