Personal loan can be a great option for your financial emergencies as it does not need any collateral and comes with easy formalities. Though infamous for being an expensive borrowing, personal loan, when managed smartly, can contribute in improving your credit score. You might have heard that a good credit score is also needed to take 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.
So, before we delve further into the importance of credit score in availing personal loan, let’s first understand the different ranges of credit score.
Credit Score Range
|0 or -1||No Credit History|
|500 – 300||Bad|
|551 – 649||Poor|
|650 – 699||Fair|
|700 – 749||Good|
|750 and above||Excellent|
Do You Know?
The credit score that is measured out of 900 is calculated based mainly on five prime factors:
- Credit history
- Length of credit period
- Total debt owned
- Type of loans taken
- New debt
Why Should You Take a Personal Loan to Improve Your Credit Score?
- Pay your old debts: Taking a personal loan is an easiest way to clear your old dues. This way, you are through with your old debts and restart the debt payment with new terms. This also helps in improving your payment history, which ultimately improves your credit score.
- Repay on time: Whenever you apply for a loan, you pay it back in installments, which are decided by the lending institution as per your repayment ability. There is no burden and hence you can easily pay the installments on time, which will be a good addition to your credit history and will improve your credit score.
Things to Keep in Mind While Taking a Personal Loan to Improve Your Credit Score
- 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: It is important to 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.
- Do not rush to other debts: As you will start paying the monthly installments, your score will start to improve and that will make you eligible for various types of loans. The offers might look tempting but it can affect your credit score in a bad way.
- Do not close your loan prematurely: Your short- term and long- term creditworthiness is taken into consideration by the lender. Even if you have the money to close your debt before your loan tenure ends, ensure to pay a bulk amount and do not close it prematurely.
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.