There are many advantages of taking a Personal Loan. Did you know you can use it to boost your Credit Score too? Read on to find out how.
At least once in your life, you are likely to face a situation where your savings and investments will not be enough to save the day. Borrowing from family and friends might not be an option either. During such dire times, you can make a breakthrough by taking out a Personal Loan.
A Personal Loan offers many advantages. One – it helps you dispel the dark clouds of financial worries. You still have to repay the loan to the bank, but you probably won’t even feel the burden due to the EMI structure. Second – a well-managed loan can do wonders for your Credit Score.
But isn’t applying for a loan supposed to lower your Credit Score? Your score will slip only a few points when you apply for a loan, but how you treat your loan has a much bigger impact on your score.
In this article, we’ll look at how taking a Personal Loan can boost your Credit Score.
What Is A Personal Loan?
A Personal Loan is a type of loan wherein there are no restrictions on how you wish to use the loan amount advanced. Most banks won’t even ask you the reason for taking this loan. You can use a Personal Loan for anything from meeting wedding expenses to medical expenses.
A Personal Loan works like any other loan but it offers more flexibility with regards to the use of funds.
What Is Credit Score?
A Credit Score is a three-digit number ranging between 300 and 900. It is a numerical expression of an individual’s creditworthiness. Your Credit Score is determined through an analysis of your credit files such as Credit Card and loan accounts. Generally, a Credit Score of 750 and above increases the chances of your loan and Credit Card approval.
Ways To Boost Your Credit Score With A Personal Loan
Pick The Right Loan Offer
Choosing the right Personal Loan is the first step towards a good Credit Score. A loan amount and an interest rate that you can easily service will ensure that you don’t default or miss EMI payments. Timely repayment of your loan has a big impact on your Credit Score.
How do you pick the right loan? By comparing them. You don’t have to run from one bank to another to find the right loan offer. Just visit BankBazaar.com and compare Personal Loan offers from almost all banks. Based on your eligibility, we’ll show offers best suited to your financial requirement and income. You can choose a loan that comes with a low rate of interest or zero processing fee or both. We even offer paperless approval process on certain loan offers. No more carrying truckloads of documents. What else could make applying for a loan this easy and fun?
Once you make your pick, apply away. Make sure you only apply for the loan amount you need. Personal Loan EMIs should fit your budget and not exceed it.
Don’t Submit Too Many Applications
Each loan application lowers your score by a few points. Unless your plans are to send your score to the underworld, submit only one Personal Loan application at a time.
Too many loan applications do not increase your probability for a loan. The story is quite the contrary. A deluge of applications will make you appear credit hungry, which banks don’t like, most likely leading to a rejection of all your applications.
A good way to go about this is to compare multiple Personal Loan offers, pick one and submit your application for the one. Do not apply for a loan immediately in case your application gets rejected. Wait for a few months before you submit another application.
Decide On The Loan Amount
It’s very important to decide on the right loan amount before submitting your Personal Loan application. The purpose of taking a loan is to tide over difficult times and to boost your Credit Score, and not to turn the loan a burden on your finances.
If you are taking a Personal Loan just to boost 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.
Always Repay Your EMIs On Time
Timely repayment of your loan EMIs has almost 35% impact on your Credit Score. Nothing will boost your score like repaying all your EMIs on time. Delayed, missed or partial payments can impact your score negatively. This is true also for your Credit Card payments.
If you are unsure of the EMI size, use our Personal Loan EMI calculator to exactly know your monthly liability. Generally, your debt should not exceed 50% of your salary.
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 damage 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 debts 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.
Lower Your Credit Usage
Taking a Personal Loan will send your credit utilisation to the higher side. High credit utilisation ratio can lower your Credit Score as it makes you look credit hungry. However, you can balance it out by lowering your Credit Card utilisation. Make sure your total debt is only 40% to 50% of your total income.
Stay Away From Debts
Once you Credit Score starts improving, your eligibility for other kinds of loans will improve too. This is when you must show restraint. Don’t take on more debt just because it comes at a low rate of interest. Keep away and reserve the perks of a good Credit Score for the future when you actually might need a Home Loan or a Car Loan.
Too much debt has never done anyone’s Credit Score any good.
Don’t Close Loans Prematurely
It’s tempting to prematurely close loans the moment you run into some money, but give the idea a second thought. Banks consider your creditworthiness over both short and long-term before taking a decision on your loan application. Long-term creditworthiness is valued when you apply for a Home Loan or Car Loan.
If you have extra cash, you can use it to repay a bulk of your loan while keeping the tenure same. This will shrink your EMIs greatly.
Having a poor Credit Score is no calamity. You can be proactive about it. Borrow thoughtfully and repay punctually, and this will have an immediate impact on your Credit Score. Want to check your Experian Credit Score for free? Just click the link below. It’ll take you less than three minutes.