Your credit score recently took a hit due to a financial emergency. And now, you’re on a mission to build it back up to qualify for that new home or car you’ve been dreaming of. Or you want a peace of mind knowing that your credit score isn’t in the trenches. Should you use a personal loan to improve your credit score?

Read on to learn why it may be worthwhile:

How personal loans improve credit scores

Five components are used to compute your FICO score:

• Payment history (35 percent)
• Amounts owed (30 percent)
• Length of credit history (15 percent)
• New credit (10 percent)
• Credit mix (10 percent)

Let’s take a closer look at which categories can be affected if you take out a personal loan.

Payment history
Making timely payments is the most significant component of your credit score. It accounts for 35 percent of the equation. In fact, a single missed payment can tank your score by up to 100 points. But taking out a personal loan and paying on time each month will show creditors that you’ve turned a new leaf. Plus, your credit score will benefit from the positive payments.

Quick note: It’s also important to get current stay current on existing desk for this strategy to work.

Length of credit history
What if you’re a credit newbie with a few late payments on a small credit card? Your credit score is suffering because the only payment history you have is negative. And you haven’t been in the credit world long enough to establish an extended track record. But personal loans usually have terms of at least one year while some go up to three or even five. This gives you an ample amount of time to build positive credit history.

Credit mix
The types of credit you have also plays a role in your credit score. Lenders want to know that you have experience managing revolving and installment debt. So, if you only have a few credit cards, a lender may hesitate to lend you money for a car loan or any other type of installment loan. But by taking out a small personal loan and managing it responsibly, you’ll improve your credit mix and credibility with prospective lenders.

Do you know what’s in your credit report?

You know your credit is in shambles because you’ve been denied credit more times than you like to admit. But have you taken the time to look at your credit report?

By analyzing the contents of your credit report, you’ll be able to identify problem areas so you’ll know what to focus on first. Perhaps you’ve made all your payments on time but all your credit cards are maxed out. Or maybe you hit a rough financial patch and couldn’t keep up with your monthly obligations. It’s also possible that you have limited credit history. Or you’ve applied for far too many loans or credit cards in a short span.

Regardless of why your score is low, knowing where to start in your journey to rebuilding will minimize headaches and give you direction. It’s also important to pull your credit report since it may contain errors.

To access your official credit report, visit annualcreditreport.com. You can retrieve a copy from each of the three credit bureaus free of charge on an annual basis. It’ll cost you to see your score or you can sign up for a free trial through one of the credit bureaus websites. But your focus should be on your what’s in your report since it determines your score.

Helpful tips and tricks

Consider a credit builder loan
Credit builder loans typically range from 200 to $500 and are designed for those with less than perfect credit. They are offered by select credit unions and community banks and come in the following forms:

• Standard credit builder loan: the lender deposits the funds into an account and reports positive payment history to the creditors each time you make a payment. Once you’ve paid off the loan, the funds are yours to keep.
• Secured-installment loan: backed by a deposit equal to the loan amount. The borrower makes payments against their own money and the funds are unlocked, along with the deposit, once the loan is paid in full. Payment history is also reported to credit bureaus.

Keep the amount borrowed to a minimum
Biting off more than you can chew will place you into even more of a financial bind. Not only will you struggle to keep up with the payments, but your credit score could sustain even more damage if the account becomes 30 days past due and the delinquent status is reported to the credit bureaus.

Use the loan proceeds wisely
The goal is to build credit, not use the funds to go on a spending spree or lavish vacation. Consider paying down debt that is costing you a fortune in interest. If you don’t have credit cards, you can use the proceeds to reduce student loan or other installment loan balances. In essence, you’ll be using one loan to pay off another, but your score will benefit.

Focus on other ways to improve your credit score
You shouldn’t expect a personal loan to be the answer to your credit troubles. It’s a great rebuilding tool but coupled with other techniques, your score will increase quicker. They include:

• Always making timely payments
• Avoiding new debt
• Paying down revolving debts to reduce your debt to available credit ratio

Explore your options
Don’t settle for the first offer that comes your way. Shop around to see what other loans for bad credit are out there. Expect to pay a higher interest rate because your credit score makes you a bit riskier. But a lower interest rate could save you hundreds, if not thousands of dollars.

Most importantly, read the fine print to learn more about the terms and conditions of the loan. Pay special attention to the payment period, interest and fees. That way, you’ll avoid any surprises later on down the line.