A good Credit Score ensures that you can borrow quicker at a much lesser rate. In most cases, a good Credit Score indicates your reliability and your ability to return the Loan in a fixed amount of time. In fact, whenever you apply for a loan, the bank you have applied to will prefer someone with a high Credit Score as its borrower.
Do you know Taking a Personal Loan can increase your credit score?
A study showed that about 62 percent of borrowers see a marked increase in their credit scores a month after they take out a Personal Loan. In this article, we will give you a lowdown of what is a credit score all about, what are good scores, how a Personal Loan helps increase this score. Besides, we will also see how to ever have a good Credit Score.
What is a credit score?
A Credit Score is a numeric rating based on an analysis of a person’s credit accounts. This represents the borrower’s creditworthiness (or the reliability in returning/paying back the Loan). A Credit Score is used to help banks or lenders decide whether the person applying for the Loan qualifies for it. The scores are also used to determine the rate at which the borrower will pay interest on the Loan and what is the maximum credit limit available to them.
What are the good credit scores?
A good Credit Score will determine whether you will get the Loan you applied for because it indicates whether you can return the money. The higher is your Credit Score; the more are the chances of you securing the Loan – the bank, in this case, is sure that with the amount you earn, returning the Loan will not be difficult. Here are the ranges of good and bad credit scores:
- 0- 1: No credit history
- 300-500: Bad score
- 551-649: Poor score
- 650-699: Fair score
- 700-749: Good credit score
- >749: Excellent score
How is the Credit Score calculated?
The credit score is calculated on a scale of 900, and there are five important factors that are considered when calculating this scale-
- Your credit history– This factors all the loans you have taken previously and whether you have paid back the loans on time. Your timely payments will ensure that your Credit Score is high.
- Length of the credit period– A longer credit period and timely payments can give you excellent credit score.
- Total debt owned– You may have a debt or two, but ensuring that you are paying them on time will not take a toll on your credit score.
- The mix of type of loans availed– A good mix of secured and unsecured loans ensure a robust credit score.
- New debt– The lesser the number of debts you have, the more are your chances of getting a better Credit Score.
How can taking a Personal Loan help your Credit Score?
Even though research does indicate that taking Personal Loans can help with your Credit Score, how exactly does this happen? B
Here are two ways a Personal Loan can help you with increasing your CIBIL score:
- Paying off debts early– In case you avail a Personal Loan to consolidate or clear your old dues, you basically wane off your old debt and restart the debt payment with newer terms. This can help in improving your payment history and as a result, can also help to increase your Credit Score.
- Repaying your Loan on time– With Personal Loans, there is no option of dilly-dallying. Whenever you take a loan, you will have to pay it back in equal instalments, and this makes you disciplined with the repayments. An important factor to increase your credit rating is to ensure that all your debts are paid on time. Paying off the instalments on time will, in the end, increase your Credit Score.
Now that you know taking a Personal Loan can help increase your Credit Score, here are some points to keep in mind before you jump on the Personal Loan wagon:
- Do dedicated research before taking the Loan
With changing times and needs, applying for a Personal Loan is just a matter of a few clicks. Apart from that, there is no dearth of options, which makes it easier for all of us to apply for any loan. Almost every bank today will offer you a Personal Loan– be it a Citibank Personal Loan or an HDFC Personal Loan. The crucial point to keep in mind is to exercise due diligence while choosing the Loan. Read the fine print and know the terms, the rates of interest, etc. before finalising the Personal Loan.
- Refrain from applying for multiple loans
Applying for multiple loans will present you as a loan-hungry person in front of the lenders. This is not an ideal situation. Inquiries that are triggered every time you apply for a loan affect your Credit Score negatively. Only apply for loans that are essential for you.
- Fix your amount
Depending on your requirement, decide on an amount that will help you. Your loan amount is decided on your salary and your position to pay it back, and sometimes, this amount may be more than what you require. Resist this temptation and only Take a Personal Loan for the required amount.
- Do not pre-pay your Loan
A cardinal sin that most of us end up committing is trying to pre-pay our Loan. If your sole purpose of taking the Loan is to build your credit, then you shouldn’t try to pay it off before your Loan matures. Longer and positive Credit History is always good for your Credit Score.
Hope your Credit Score stays positive ever!