How to use Personal loans to get better credit scores?
Published on : March 25, 2021

Personal loan is a  great solution to meet any financial emergency or one when needs financial support to fulfil one of their goals. A personal loan requires no asset to be pledged against the borrowed sum. However, this is one of the reasons personal loans are deemed to be riskier by financial institutions than a secure loan and are priced accordingly.. But when personal loans are prudently serviced, they could contribute positively to improve your credit score. 

So would it be right to say that you could use your personal loan to improve your credit score? Yes, absolutely!    

A personal loan plays a major role in affecting your credit score – either positively or negatively. Availing a personal loan itself initially reduces your score by a few points. However, paying your personal loan on a timely basis certainly boosts your credit score. 

As we all know the primary factor considered by lenders while approving your personal loan is a Credit score, let’s understand how we can change the game in our favor! 

Do not apply with Multiple lenders 

Everytime you apply with a lender, the primary thing it does is to access your credit score – which accounts for a ‘Hard enquiry’. Every hard enquiry reduces a few points from your credit score. Thus, if multiple lenders access your credit score, you can imagine the damage you could be doing. We certainly do not want that. You must apply for one loan at a time and wait for your personal loan approval. 

Choose amount at par with repayment capacity

When you are not certain about the total amount you require, you may tend to over borrow, i.e. borrow more than you really need. At such times, it may become difficult to pay off the amount in the long run. Also, before taking a personal loan, you must carry out a detailed analysis of how much EMI can you afford keeping in mind the existing expenses. This will ensure that you are able to pay the installments regularly without burdening your monthly budgets.

Choose a Longer loan Tenure

Unless you are willing to close your loan in a short period of time, you must choose a longer loan tenure for your personal loan. A longer repayment period will help minimise the monthly installments, as it is spread across multiple months. Smaller installments are much easier to cope up with, especially keeping in mind the day to day expenses that cannot be neglected. So, a longer loan tenure may be favourable for you. And if you are worried about high interest that may come along with a long tenure, don’t worry, there are certain companies that allow you to close your loan account without any prepayment charges. So, even if you wish to close your loan early, you can easily do so. This gives you more freedom to manage your budget as well as credit score..!

Make timely repayments

Making timely payments against your personal loan can be considered as the primary factor to improve your credit score. Paying your dues on time, without any delays denotes how responsibly you service your debts. This has a direct, positive impact on your credit score. Any defaults or late payments may put all the earlier efforts in vain. 

Report errors in credit report

While servicing your personal loan, you must ensure that all your payments are being updated on the lenders portal. Alongside, you need to keep a constant eye on your credit report. Keeping a check on your credit report allows you to spot any errors in the report. In case you are wrongly charged for any missed payment or incorrect transaction, you need to have the act reversed. Spotting errors on time can spare you the time and effort you may have to spend otherwise, to explain to the next lender about your low credit score.

Read more about errors in a credit report – Credit Reports can have errors. How to Fix Them!

A personal loan can help bring financial discipline if these few things are kept in mind. While you can meet your financial needs with a personal loan, you can also ensure that it adds positively to your credit profile. People often use a personal loan to consolidate all their debts, as it proves to be easier to service the debts and maintain a healthy credit score.

So, if you are planning to take a personal loan, keep in mind the above points, and you are off to a good start on the path to maintaining a healthy credit score.

Related article – Good Credit habits are here: How to build High CIBIL Score