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kate_sept2004 / Getty Images

Millennials face unique financial challenges with student loan debt, housing costs and economic uncertainty affecting this generation disproportionately, many are looking for strategic ways to improve their credit profiles.

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The generation, aged 27 through 42, is not scoring far above Gen Z, with a 690 average, suggesting significant room for improvement compared to older generations who typically have higher scores.

Personal loans can be a powerful tool for millennials to boost their credit scores when used strategically.

Here are six specific ways a personal loan can help improve your credit standing and set you up for better financial opportunities.

One of the most effective ways a personal loan can boost your credit score is through debt consolidation. Debt consolidation works by paying off existing debts with a new loan or balance transfer credit card, according to Experian. This can be a good strategy when you have multiple balances because it allows you to streamline your monthly payments, which can make getting out of debt more manageable.

When you use a personal loan to pay off high-balance credit cards, you’re essentially moving revolving debt to installment debt. This shift can dramatically improve your credit utilization ratio, which accounts for 30% of your credit score. Combining multiple credit cards with a debt consolidation loan could provide a large boost to your scores since it reduces your credit utilization ratio.

For example, if you have $8,000 in credit card debt across multiple cards with a total credit limit of $10,000, your utilization ratio is 80%. By consolidating this debt with a personal loan and paying off the cards, your utilization drops to 0%, which can result in a significant credit score increase.

Payment history plays the biggest role in your credit score, making up 35% of it, according to Faster Capital. Personal loans provide an excellent opportunity to establish a consistent track record of on-time payments, and debt consolidation loans could even benefit your credit score if you keep payments consistent, according to Lending Tree. As you pay off your debt, you’ll reduce your debt-to-income ratio and demonstrate to creditors that you can make timely payments. Over time, this can boost your credit score.



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