Personal loans have evolved to become a smart choice by many individuals for their business and other financial needs. There are various financial institutions and lenders who provide personal loans for different needs and limits, depending on the purpose of the loan. Without proper knowledge and understanding of the same you cannot negotiate the right personal loan for your needs and requirements.
Also, lenders have started putting major emphasis on the borrower’s credit score while applying for the loan approval. Due to this, most people, especially young workforce professionals, have started working out ways to improve their credit score by fulfilling their financial obligations through a personal loan facility. Moreover, you can improve your creditworthiness through different ways, but you must also be aware of the myths surrounding the same.
As you know, many people believe that when you take a personal loan, you can negatively impact your credit score. But, this is true only if you handle the same without any proper planning and awareness about the same. By understanding and implementing the right ways to improve your credit score through personal loans, you can easily tackle the risk associated with the same. Therefore, you need to understand the relationship between the credit score and the personal loan, which is essential to develop a good credit score with the same.
How Does Credit Score Work?
The credit score is officially calculated and managed in India through the international credit bureaus like TransUnion CIBIL Ltd., which helps all the national and international credit card users and borrowers in India to manage their credit scores. There is a score range between 300 and 900, and anything above 750 is officially considered by the banks as a good credit score to lend loans. Thus, it is the right time that you use a credit score checker to find your credit worthiness.
These credit bureaus consider various factors for calculating the credit score. Here are some crucial factors with the most important factor starting the list:
- Credit History
- Credit Utilization
- Credit History Tenure
- Credit Mix
- New Credit
There are various proprietary algorithms deployed by the bureaus to calculate the credit score of the individuals based on the above listed factors.
Relation Between Personal Loan and Credit Score
You all must be aware that a personal loan is not a usual type of loan, which allows you to get the loan approved without any collateral requirement against the amount. With the highly competitive interest rates in the market for personal loans, it becomes the smart choice for managing a group of financial needs for many individuals. But, to make it a more lucrative investment than a need-based credit source, institutions have designed it as a tool to gain benefits by fulfilling the terms and conditions for the same.
Moreover, it doesn’t matter which type of loan you acquire for the credit bureaus, as long as you repay your loan amount on time, your credit history will definitely improve, improving your credit score. But, since the personal loan amounts are lesser compared to other loans like home loans, etc. the time period for improving the credit score is reduced, motivating the individuals to borrow personal loans and repay them on time.
How Personal Loan Impacts Your Credit Score?
As a matter of knowledge, you must note that personal loaning is a better option than using your credit cards for improving your credit rating. The reason why personal triumphs over credit cards for funding your financial needs is because the online or offline personal loan approval can help in reducing the credit utilization ratio, which becomes the second most crucial factor for credit bureaus to calculate the credit scores.
Also, the personal loans utilization impacts other factors too like credit history tenure and credit mix, which gets positively affected in most cases. Like, when you take short-amount personal loans and repay them on time, it increases your credit history tenure without any long-term loan obligations, and also it becomes a different type of loan facility adding to the credit mix points. In short, switching to the personal loan facility for your financial needs can easily help you improve 90% of the credit score factors used by the credit bureaus.
How Personal Loan Impact New Credit Point System?
Credit bureaus take new credit as another most important factor for credit score calculation. Well, you must know that applying for new loans from different lenders within a short duration of time reduces your credit score slightly.
However, this fall is temporary and small enough to be easily replaced with the positive gain in the credit score, when you timely make your payments for the personal loans from different lenders.
Final Thoughts
Thus, you can apply for a personal loan for your financial assistance, being assured of the credit score checker improvement provided that you repay the loan on time, managing the money borrowed responsibly. Also, believing the myths like personal loans decreases your credit score is a waste of opportunity to improve your credit score. Just plan your repayments prior to the personal loan, and convert the debt into an investment opportunity.