A Personal Loan is now considered as the go-to option when we need instant funds. As this type of a loan is an unsecured loan, there is no underlying collateral or security required. Personal Loans in return help you to boost your credit score. Yes, you need a good credit score to avail a personal loan itself, but there are many banks and NBFCs which might give you the loan even if you have a fair credit score. They will assess your creditworthiness by seeing if you meet their other criteria as well.
Why Take a Personal Loan?
A Personal Loan is a good option for purchases which you wish to repay in a few years. You can use it for any purpose as there is no collateral required unlike Home Loans or Education Loans. Many banks and NBFCs have come up with instant personal loans which save time when in need of emergencies.
What is a Credit Score?
A Credit Score is a statistical number of your creditworthiness. It is based on your credit history. In India, the Credit Score is also known as a CIBIL Score as it is given by the Credit Information Bureau India Limited. All lenders check the credit score to evaluate the credibility of the applicant. The value of a credit score ranges from 300-900. If you have a high credit score then you are considered as a worthy applicant and not a risk.
How does A Personal Loan Help Improve Your Credit Score?
Here we explain how you can use an easy personal loan in your favor to build an impressive credit score.
1. When You Replace Your Credit Card Debt with Personal a Loan
Credit Cards are an easy option for credit. But as two sides of the same coin, credit cards can sometimes ruin your credit score. Credit cards provide debts in installments and have huge interest rates. Adding to this, if you have multiple credit cards, then it is all the more difficult to pay the bills. Your outstanding balance will keep increasing with the interest rate and this will reflect badly on your credit score.
In such cases, you can replace your credit card payments with a personal loan. You can consolidate all your credits under a personal loan. For this, you need to analyze your credit payments. You need to take a quick decision before the credit score dips further because you need a fair score to avail a personal loan too.
Here are a few reasons why you should take a personal loan for debt consolidation:
- A personal loan comes cheap than credit cards.
- With a personal loan, you only have to pay the interest rate for one loan, rather than paying multiple interest rate for multiple credits.
- You only need to pay EMI on a single loan, rather than of the multiple credit cards you have.
- Personal loans have a fixed repayment term, while credit cards have a rotation system. When you pay your EMIs on time for a certain period, it helps improve your credit score.
2. When You Use a Personal Loan to Pay a High-Interest Loan
A solution to your high-interest loan is that you choose a personal loan with competitive interest rates. You can then pay off your high-interest loan with a personal loan. This way you can save on the extra interest rate costs. This will help you manage your finances well and help you do your payments regularly.
3. Maintain a Strong Credit History
For the long run, Personal Loans play an important role in maintaining a good credit history. If you pay your loan on time, it helps you maintain a good credit score.
4. Reduce Your Credit Utilization Ratio
A Credit Utilization Ratio is the amount of credit you are using currently divided by the total amount of credit available with you. For e.g., if you have a total credit limit of Rs. 1 Lakh available on two credit cards, of which one card has a balance of Rs. 50,000, then your credit utilization is 50%. You are exhausting half of the total credit limit. When you pay off these credits using a personal loan your credit utilization ratio is reduced which helps you improve your credit score.
Before you decide to apply for a Personal Loan, make sure you have an idea of your monthly EMIs. You can use a personal loan EMI calculator to get an estimated amount of the EMIs. With these benefits, you can consider taking a personal loan to improve your credit score.