Ways how a Personal Loan improves credit scores

[Abhilash Rathore]

Applying for a Personal Loan lets you handle multiple expenses. It is an unsecured credit that banks offer and does not require you to provide any collateral. This makes it an ideal choice for people who need financial assistance for various needs. For instance, you can apply for Personal Loan to pay for a vacation, emergency home repairs, buy a home appliance, or consolidate multiple Loans. You can also apply for such Loans to improve your credit scores. Here is how.

What are credit scores?

A credit score is a person’s creditworthiness. It also reflects their ability to repay debt. It is typically expressed as a number and depends on a person’s repayment history and credit files across various credit institutions and Loans.  The most renowned credit score in India is the CIBIL rating. The CIBIL credit score refers to a three-digit number between 300 and 900. Here, 900 indicates the best score.

Personal Loans and credit scores

Now that you know about credit scores, let us understand how Personal Loans boost them:

• Complete your Loan repayments

When applying for a Personal Loan, ensure you pay the equated monthly instalments on time. This builds a strong payment history, which can reflect positively on your credit score. You should aim to pay your EMI entirely every month. To ensure you can repay your Loan comfortably, use a Personal Loan EMI calculator to determine your potential EMIs. This provides an idea of how much money you need to set aside every month, letting you plan your monthly budget effectively.

To find out your EMIs using the calculator, find a reliable one online. Then, enter the Loan amount you want to borrow, your chosen tenure, and the Personal Loan interest rates offered. Once you input these correctly, the calculator instantly displays your EMI.

• Diversify the credit mixes

When you have a diverse credit mix of revolving credit, like Credit Cards and instalment credit, such as Personal Loans, it can positively impact your credit scores. Hence, adding a Personal Loan boosts your credit scores if your credit report mainly includes Credit Cards.

• Reduces credit utilisation

If you apply for a Personal Loans online with a Credit Card, you can decrease your credit utilisation ratio. This enhances your credit scores.

• Establishes positive credit history

If you have limited credit history or are new to the world of credit, a Personal Loan acts as a positive credit reference. This helps establish a credit history that results in a higher score with time.

Conclusion

Using a Personal Loan to boost your credit score is possible. However, remember to be responsible when borrowing and make smart financial choices.