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This is How Personal Loans can Improve Your Credit Score


Personal loan can be a great companion for your financial emergencies as it does not require any collateral and comes with easy formalities. Though infamous for being an expensive borrowing, personal loan, when managed smartly, can go a long way in improving your credit score. Now you might think that a good credit score is also needed to take a personal loan in the first place. Yes, that is correct! But you should also keep in mind that credit score is not the only thing that lenders consider to determine your credibility. There are a few lenders who are ready to grant unsecured loans to people with ‘fair’ scores, if they successfully meet the other criteria.

Taking a personal loan for the purpose of credit building is especially helpful in two scenarios.

Using Personal Loans for Debt Consolidation

Outstanding credit card bills will do more harm to your credit score as they are instalment debts and carry huge interest rates in case you miss the payment. Over limit charges are also there to add to your worries. And when you have two or three cards with such debts, it is a total nightmare. The interest will keep adding on to your outstanding balance which will wreak havoc on your credit score.

One of the most viable options in this case is to avail a personal loan to consolidate the debts on different credit cards. You must do this as soon as you realize that your credit card bills are going out of hand because it is possible to get a personal loan with a fair credit score, but a ‘bad’ score does not help. A personal loan works out best for credit card debt consolidation because-

  • Personal loan is cheaper than credit cards
  • You will save on the interest charged on different credit cards and replace the same with a single personal loan
  • Single EMI will be more manageable than three different EMIs
  • Over a period of time, your credit score will gradually improve

Your credit score will not shoot up as soon as you pay off the debts. As you make regular payments towards your personal loan, the score will gradually recover. Also the banks might consider you as a less creditworthy person for a few months down the line as delayed payments are the most detrimental for your credit profile. So, it is advisable to pay off your piled up credit card debt with personal loan as soon as possible.

Using Personal Loans to pay off a High-interest Loan

Even if you are not facing any difficulty in paying off a loan, it is still not wise to keep paying high interest when you have other choices. You can choose to pay off your high-cost borrowings if you can avail a personal loan at competitive interest rates. Banks in which you have savings account or deposit account will be eager to give out personal loans at lower rates.

When you pay off your high-cost loans with a personal loan, you can save on the interest cost. It will also be less of a burden on your finances so you will be able to make regular payments which will improve your credit score.

So if you are thinking of using a personal loan to build your credit rating, here are a few things you need to keep in mind.

Do not apply for multiple loans- You should not present yourself as a credit hungry person in front of the lender. Also, a hard enquiry is initiated on your credit report every time you apply for a loan and it impacts your credit score. Too many hard enquiries are considered negative for a borrower.

Decide the amount carefully- We cannot emphasize more on the fact that you should take personal loan for an amount you actually need. Now since you are taking the loan for repairing your credit score, the amount of loan becomes a very important factor. Assess the need and then take the loan.

Make regular payments- Taking a personal loan for credit improvement will not make any sense if you default on EMI payments or delay them. Credit cards and personal loans, both being unsecured, impact your credit score the most. So make a habit of paying your EMIs on time.

Do not pre-pay your loan- If you have taken a loan for the purpose of credit building, you should not pay before your loan matures. A longer credit history is considered better. So if you keep making regular payments till a longer tenure, your credit score will be better.

A personal loan is not just meant for financial emergencies but is also helpful in building a good credit rating. Consolidate your debts or take a personal loan for an amount that you can easily pay off.

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