The credit score is a component that plays a vital role in getting approvals for loans. High credit ratings increase the chances of getting loans with low-interest rates. Obtaining loans at a reasonable rate becomes difficult if one has a history of credit problems.
Maintaining a credit score of 750 or higher will allow you to obtain a personal loan at a more favorable interest rate. There are many channels via which you can enhance the number that represents your creditworthiness.
You may maintain a good credit score by acquiring various credits, but you shouldn't borrow beyond a certain limit. Make sure that the overall sum of your EMIs don’t exceed 40% of your income. The monthly payment of a loan that has been predetermined comprises not only the interest but also a portion of the principal. Having a lot of debt on credit cards with high interest rates will reduce your credit score. At such a time, consolidating multiple debts with a single personal loan at a lower interest rate and a single monthly EMI would be beneficial. Timely repayment of the EMI as per the agreed-upon schedule will help you improve your credit score.
Borrowing a personal loan can strengthen your credit standing in the long run. Personal loans, when utilized responsibly, can be an effective tool for eliminating debt and building a positive payment history, both of which can assist raise a person's credit score. If your credit score is low and you cannot get a loan at favorable terms, it is advisable to wait and improve your score by paying off existing debts instead of taking another loan at high-interest rates.
Many assume that getting a personal loan will harm their credit score. This statement is inaccurate; a personal loan can help enhance one's credit score. To get a handle on how a personal loan and one's credit score are related, one must first be familiar with the methodology behind determining one's credit score.
Calculation Methods for Credit Score
In India, credit bureaus like CIBIL are responsible for monitoring credit-related transactions and updating borrowers' credit scores, including those who use credit cards. The score can range from 300 to 900, with a score of 750 or more considered favorably by lending institutions.
When determining a person's credit score, credit agencies consider many factors. The most critical factors are:
- Credit background and credit use history
- The duration of one's credit history
- Blend of Credit
- New credit
The agencies turn to exclusive algorithms when determining an individual's credit score based on the above-mentioned considerations.
Strategies for Enhancing Your Credit Rating with the Use of a Personal Loan
Your credit history can be improved in a few different ways with the help of a personal loan. Loans to consolidate existing debt and loans to build credit tend to be the most frequently chosen alternatives.
Consolidation of Debts through Loans
As the name suggests, these loans are personal loans utilized to consolidate existing debt.
Designed to Create Credit
A personal loan is used by many as a credit-builder loan. This is especially useful for borrowers with no credit history and thus may have a CIBIL score of “-1” or “NH”. Fullerton India provides loans to eligible candidates with no credit history, providing that they meet the other required criteria in terms of age, income, employment, work experience, and so on.
Pay off your credit card bills
A personal loan is a valuable financial instrument that does not have end-usage restrictions. Therefore, you can keep the funds for emergency purposes or use them as a fund to pay your credit card bills timely. In such a case, you will not be dependent on your salary/income to pay the bills. Paying credit card bills timely is immensely helpful in building a good credit record.
The Bottom Line
Getting a personal loan for debt consolidation helps you manage multiple debts efficiently. Timely repayment of the EMIs allows you to establish a history of on-time payments, which would benefit your credit score. Before applying, ensure that you do your research well. Choose a reputed lender whose eligibility criteria match your profile. Ensure that you understand the terms of the loan product well (such as interest rate – on a monthly Vs annual basis) so that you can be sure that you have obtained the best interest rate for a personal loan available for your specific circumstances by comparing loan offers from multiple financial institutions.
However, making multiple applications to several lenders simultaneously lowers your credit score – so make sure you choose the lender well and apply only to one at a time.
It is important to remember that this type of credit repair technique has its downsides if you fail to make wise decisions. A new loan may initially lower your credit score as it entails additional risk. Be sure to make timely payments consistently and avoid opening any new accounts.