How Personal Loan Can Boost Credit Score?

A personal loan is a general purpose installment loan which is borrowed from banks, NBFC’s and credit union. It is a collateral- free loan which means you do not require to attach any security and must be pay back in fixed monthly payments or installments. . As it is a multi- purpose loan it can be used to fulfil various purposes such as auto expenses, wedding expenses, education, home renovation, sudden medical emergencies and debt consolidation. 

Have you ever thought that the personal loan can actually improve your credit score? But isn’t applying for a loan supposed to lower your Credit Score? Personal loan has all positive effects on the credit score especially if you are using it to pay down existing, higher interest rate debt. A credit score is measured to check a person’s ability of repaying the amount taken by the banks or NBFCs.  It is a numerical expression which lies between the range of 300 and 900. Having a high credit score benefits you in quick loan sanctioning. Therefore, it becomes easy to avail the personal loan.

Pick the Right Personal Loan Offer

Choosing a right personal loan is the first step towards a good credit score. You will not miss the EMI payments if you choose the personal loan with lower interest rates. Paying your EMI on time increase your credit score.  If you subconsciously forget to pay off your EMI then set up an automatic payment system through your net-banking. By doing this you will always pay the bills on time.

How can you choose the best personal loan offer? You can easily choose it by comparing different banks. There is no need to pay visit from one bank to another as technology has made everything easier. You can check them online.

Personal loan comes up with various features including low interest rates and paperless approval procedure. Therefore, make sure you only apply for the personal loan which is best suiting to your financial requirements and income.

Avoid Submitting Multiple Applications

Submitting too many applications for the personal loan lowers your credit score. This act doesn’t increase your probability for getting the personal loan but make you appear credit hungry in front of the bankers or lenders. Try to submit only one personal loan application at a time. Otherwise, it will lead to a rejection of your personal loan application.

The best way to avoid this situation is to compare multiple personal loan offers, pick one of them and submit your application. In case of rejection do not apply for the loan immediately, wait for atleast 3 months before you decide to submit it again.

Decide on the Loan Amount

Personal loan are taken by individuals in order to improve the credit score. Hence, it is important to decide a loan amount before submitting the personal loan application. Make sure you do not avail the amount more than you need it. 

If you are taking a Personal Loan just to improve your finances then make sure that you apply for a small amount. This way you can work up your score and also stay away from unmanageable debt.

Repaying EMI’s on Time

Repaying EMIs on time has 35% of impact on the credit score. Nothing will improve your credit score more than paying off your payments on time. Delayed, missed or partial payments can impact your score negatively. This is true also for your Credit Card payments.   

If you want to check your EMI size then you can check it through personal loan EMI calculator. You just need to mention loan amount, interest rates and tenure.

Consolidate Your Debt

Too many debts can get unmanageable. This also means you have to service different interest rates. It can get hard to keep a track of all your debts and mismanagement can start causing some serious impact to your Credit Score.

A Personal Loan can come to your rescue in such troubled times by helping you consolidate all your debt. Use the loan to close your high-interest loans first. Once your many debts are cleared, you only have to worry about clearing your Personal Loan. Make sure you make timely repayments if you want to improve your score and don’t want to fall into another debt trap.

Credit Score Helps in Getting a Personal Loan

Lower the Credit Utilisation: A personal loan is an instalment loan. Due to this, the debt do not consider in the credit utilisation ratio. If you pay off revolving debt with a personal loan, it will lower your utilisation ratio, which can have a positive effect on your credit scores.

Adds Variety to the Credit Type :  There are total five factors that affect the credit score: Payment history, credit utilization ratio, length of credit history, new credit inquiries and credit mix. However, credit mix counts for 10% of your credit score, a personal loan can help by creating a more varied mix of credit types, which lenders and creditors tend to view favorably.

Establishes the Payment History: A personal loan can assist the credit scores as long as an individual makes his payments on time and in full. The more on-time payments you have, the better your credit score.

Debt Consolidation: Paying down balances on credit cards by bundling them into one, the lower-interest-rate loan is known as debt consolidation and can help boost your credit scores.

Therefore, if you take a personal loan it will definitely help you to improve the credit score.

Facts of Credit Score

A credit score is a numerical expression or a three digit number based on person’s credit report and information fetched by credit bureaus. It is the reflection of one’s credit history. It represents a person’s credit worthiness for availing the loans. A good credit score is 750+ is essential if you want to buy a house, finance a car, get a credit card and rent an apartment. Credit bureaus such as CIBIL, Experian and Equifax only focus on the relevant information related to your credit history or EMIs on your loans such as a Home Loan or a Car Loan.

Other organisations such as mobile phone companies, insurance companies, landlords, and government departments use the same techniques. Digital finance companies such as online lenders also use alternative data sources to calculate the creditworthiness of borrowers. There are various fascinating facts which you should keep in mind when you think of credit score.

1. Investments and Savings Do Not Affect the Credit Score

In order to boost your credit score you have been investing money in top performing mutual funds. Nonetheless, your credit score remain the same because credit score isn’t affected by savings and investments. In order to increase the credit score you can pay bills on time and reduce the amount of debt you owe. You can also check your credit report for errors.

2. Multiple Soft Inquiries of Credit Score is Not Harmful

A soft inquiry is a direct inquiry of the credit score from any credit bureau. You are free to make multiple soft inquiries of your credit score. Only hard inquiries hurt your credit score. Hard inquiry is usually done when someone applies for a new credit from a bank or NBFC.  

3. Credit Bureaus Do Not Edit Your Credit Information Directly

A credit bureau is a data collection agency who gathers account information from various banks, NBFCs and Credit Unions. It provides the fetched information to a consumer reporting agency. It is true that Credit bureaus generate and update your credit report through the grabbed information. However, credit bureaus do not hold the power to edit or delete someone’s credit history or information. They cannot directly edit the information of your credit score.

4. A Good Credit Score

What is a good credit score? A credit score of 700 or above is generally considered good. A score of 800 or above on the same range is considered to be excellent. Most credit scores fall between 600 and 750. Higher scores reflects better credit decisions taken by you and can make lenders confident that you will repay your future debts as agreed. Every person needs to require at least 750 score to avail any kind of loan. However, there is no clear number which decides your fate of getting loan. The cutoff point for “good” credit depends on what you’re trying to buy, and who you ask. As different banks have their own requirements and policies.

5. Irrelevant Factors

The factors which are not included while checking the credit score are an individual’s race, religion, color, sex, age, salary, profession, title, employment history and marital status. Your bill payment history, your credit history age, number of credit inquiries, types of credit on your report and your level of debt matter in your credit score. Moreover, earlier an individual had to talk with the lender or banker when the credit scores did not exist. It was a quite subjective process because if the lender didn’t like you or think you were not trustworthy, you weren’t going to be approved.

6. Credit Score Still Exists Even If Have Not Checked by You

There’s just one simple rule to your Credit Score. If you’ve got a credit history, then you’ve got a Credit Score. So, irrespective of the fact that whether you have checked your Credit Score or not your Credit Score will exist if you have ever borrowed money from a bank or have had a Credit Card. Banks and other NBFCs send in a monthly report of their borrowers credit transaction history to credit bureaus.

Therefore, these are some of the facts which you need to keep in mind whenever you think of your credit score.