How a Personal Loan Can Have a Positive Impact on Your Credit Score
New Delhi, May 31: Dreams, aspirations and goals are an integral part of our lives. In pursuit of these goals, you may come across some hurdles like lack of support, or too many goals to be achieved at the same time. However, limited financial legroom or medical emergencies are among the most common reasons that can prevent you from achieving these goals. This is where a personal loan comes in as a simple solution to help you deal with any of these situations.
What is a personal loan?
A personal loan is an unsecured loan, or a collateral-free loan. The best part about this loan is that it does not come with an end-use restriction. Accordingly, it can be used for any purpose as per your needs. You can use the amount from a personal loan for aspirational spends like buying the latest gadgets or an exotic vacation, to critical expenditure like funding medical emergencies or immediate working capital for a small business.
Just like any other loan, the borrowed money needs to be paid back over a fixed tenure along with the interest in smaller equated monthly installments (EMIs). The second-best thing about a personal loan is the easy eligibility criteria and simple process to avail one. Hence, it is not a surprise that the popularity of personal loans is on a sharp rise given the flexibility and convenience.
Importance of Credit Score
A credit score is basically an index that represents your creditworthiness. A higher credit score means that potential lenders would be more interested in lending to you. The credit score is broadly a derivative of your credit and repayment history. It is a crucial factor for lenders to decide if a loan should be approved. In many cases even the interest rate to be charged to a prospective borrower is determined basis this score.
Credit information companies or credit bureaus examine your loans and repayment history and assign a three-digit number to summarize your credit history. Accordingly, your credit score ranges between 300 and 900.
The credit score is calculated using information from your credit history, including your repayment history, the total amount owed, length of credit history, credit mix, and most recent credit inquiries. A credit score of 700 to 750 is considered a fair score and may get you through the door, based on the type of loan. A credit score of less than 700 is considered poor and is likely to result in loan rejection, while a score of over 750, which is considered to be a good score, can give you some more leverage to bargain for a lower interest rate.
Essentially, the higher your credit score, the more credit you'll have access to and lesser the interest you are likely to pay. If you have poor credit score, it will be difficult for you to obtain affordable credit. This becomes a crucial factor while availing big-ticket loans like a home loan, where even a difference of a few basis points can have a significant impact on the total repayment amount over the tenure of the loan. Hence, having a good credit score is crucial to get affordable loans in the future.
So, how do you maintain a good credit score?
How to get and maintain a good credit score
By definition, a credit score is built after repaying loans. So in such a situation, if you do not have sufficient credit history for a good credit score, or have a poor credit score, getting a personal loan and then repaying it on time can help you build a good score in a span of a few quarters.
A personal loan can help you improve your credit score in the following ways:
Build a payment history
To establish a good payment history, always make your personal loan EMI payments on time. Your credit score will get a boost if you have a good payment history.
Consolidate existing loans
To consolidate your existing debt obligations, you could take out a single personal loan. This will reduce the amount of interest you pay on your debt and ensure that you repay your personal loan in a systematic manner through the EMIs. From a credit score calculation point of view, this will reduce the chances of missing out on any repayment as you will be paying only one EMI for the personal loan instead of several smaller EMIs.
Enhancing the credit mix
Credit mix is a crucial factor in the credit scoring formula. The diversification of the different types of loans or lines of credit you are currently paying off, or have paid off in the past is referred to as credit mix. Adding a personal loan to the mix can help you improve your credit score because it shows that you have dealt with various types of credit before.
Checking your credit score from time to time is a good practice even if you don't see yourself availing a loan immediately. It is likely that you might need a loan in the future, and tracking and building a credit score at that point would become difficult.
You can keep a track of your credit score through the Finserv MARKETS website or App. You not only get to check your credit score for free, but can also get a detailed Credit Health Report.
Get a personal loan to build a credit score
As highlighted above, getting a personal loan and repaying it on time is among the easiest and quickest ways to build a healthy credit score. Moreover, you can utilize the amount from the loan for any purpose of your choice.
However, it is also crucial to take a calculated decision on the amount of loan to avail, so that your monthly cash flow and lifestyle is not affected. To understand what loan amount suits you the best for a particular repayment period, you can use the Personal Loan EMI Calculator on Finserv MARKETS. In a nutshell, this calculator allows you to run various permutations and combinations to arrive at the right mix of loan amount and tenure as per your repayment capacity. This allows you to plan ahead of time for debt repayment, avoiding missing EMIs and thus maintaining a good credit score.
At Finserv MARKETS, you can choose a personal loan that suits your needs after comparing the products of different financial institutions. You not only get to choose from a pool of offerings from leading financial institutions, but can also get an instant loan approval of up to Rs 25 lakhs. You will also have the option of repaying the loan over a flexible tenure of up to 60 months.
If you have been planning a wedding, or a trip to your dream destination, or home renovation, or even an expansion of your business, a personal loan can help you out without you having to worry about the collateral. In fact, all of this can be done quickly in a matter of minutes right from the comfort of your home through the Finserv MARKETS website or App. Don't delay any further, apply for a personal loan and reap dual benefits of achieving your financial goals and also build a good credit score, today.