A Personal Loan is availed without any collateral to fulfil your sudden financial requirements such as medical expenses, travel expenses, business needs, wedding plans, etc. Since it is unsecured, lenders have a higher risk of lending you the loan amount. Hence, they consider credit score an essential factor in indicating your creditworthiness.
Though having a good credit score is essential, it is not the only deciding factor lenders consider. They also consider other factors such as income, eligibility, and accuracy of your documents when approving your loan. Therefore, you can still get a personal loan as some lenders offer loans even with an average credit score.
But, did you know that you can use your Personal Loan to Improve your Credit Score? If you are wondering how? you will learn from this article how you can boost your credit score through your loan.
Before going to the topic, let us first understand what a credit score is and the standard range for credit scores.
What is a Credit Score?
A credit score ranges from 300 to 900, and it is a three-digit number that represents the creditworthiness of an individual. This score is generated based on various factors such as repayment history, existing credit, transaction history, etc. Usually, a score above 750 indicates good and consistent credit history. Therefore, you can quickly get a loan for comparatively lower interest rates.
Also Read: Know The Different Types Of Credit Score
Credit Score Table
|300 to 600
|601 to 700
|701 to 760
|761 to 800
How Taking a Personal Loan can be Beneficial to Improving your Credit Score?
The following benefits from applying for an instant personal loan to boost your credit score.
Clearing your unpaid debts
If you have missed out on any payments or have any outstanding debts, you can apply for a personal loan at lower interest rates to clear all your pending debts in a single loan. As a result, it will improve your repayment history and credit score.
Making timely payments
After getting a personal loan, you must repay the loan amount on time within the selected tenure period. By doing so, your credit score will start improving as your repayment history also enhances.
Essential Things to keep in mind when Availing a Personal Loan to Improve your Credit Score
Avoid Applying for Multiple Loans
You initiate a hard inquiry every time you apply for a loan. As a result, your credit score will get affected negatively, and your lender will see you as credit hungry.
Do not Take a Loan Amount More Than you Require
Since personal loans are readily available, you might feel tempted to take more than you need. But if you do so, you will not be able to repay your dues on time due to financial burden. As a result, your credit score will crash, reducing your credit history. Therefore, you must take the loan amount only what you require.
Avoid Pre-Payment of your Loan
Here, the main reason for taking a personal loan is to improve your credit score. Therefore, it is best to make regular repayments for a longer tenure. Moreover, a long and consistent repayment history will help you improve your credit score.
Compare the Interest Rates
Before applying for a personal loan, do a comparative analysis of the interest rates provided by various lenders and choose the bank that offers low-interest rates. You can quickly repay your past debts using a personal loan at lower interest rates.
Calculate your EMI
You can repay your loan amount through EMIs. Therefore, it is best to plan and calculate your EMI from various sources. As a result, it will give you a clearer picture of your expenditure.
Review your Credit Report Regularly
Your report may have errors when not updated. Therefore, check your report at least once a year regularly. You can also check your credit report quickly using Buddy Score to know your creditworthiness. If you find any errors, report them immediately to your respective credit bureau and get them rectified. As a result, your credit score will improve gradually.
Length of your Credit
If you have long-term credit and have made timely payments, your credit score will improve, thereby increasing your creditworthiness.
How to Use your Personal Loan to Leverage your Credit Score?
When using your loan, keep in mind that the primary purpose of this loan is to improve your credit score. Do not be tempted to use it such that your score drops.
The following tips will help guide you on using your loan amount to your advantage to improve your score.
- Use your loan amount to first repay all your existing and past debts. After clearing your debts, do not close your account. Instead, maintain your old account to continue getting the benefits from your credit.
- Make payments on time without fail. You can also set reminders to help you make timely payments. If you do this consistently for six months to a year, your score will increase. As a result, there is a higher chance of getting your loan refinanced at low-interest rates.
- A personal loan will also help improve your Credit Utilization Ratio (CUR), which accounts for 30% of your FICO score. Maintain your credit utilization ratio below 30% of your income to improve your score.
- By choosing a short tenure period, you can quickly pay off your debts faster, improving your score quickly.
- A personal loan will also help you improve your score by building a good credit mix.
A personal loan is considered the most convenient source of money, and you can avail of a personal loan to fulfill your financial needs or improve your credit score. By following the tips mentioned above, you can use your loan amount wisely to leverage your score gradually.
However, if you fail to use it to your advantage, your score might fall because taking a new loan implies additional risk. When you repay your past debts and make timely payments, you improve your score using a personal loan. If you want to take a personal loan, you can apply for one easily using Buddy Loan, with interest rates starting from 11% per annum.
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People Also Ask
Q. What is the Minimum Credit Score for Personal Loan Eligibility?
A. The minimum credit score for a personal loan should be above 750.
Q. Can I get a Personal Loan if I Have a Bad Credit Score?
A. You can get a personal loan with a bad credit score by showing your income statement, getting a co-applicant with good credit history, and resolving errors in your credit report.
Q. Can I get a Personal Loan if I Have a Credit Score of 650?
A. Yes, you can get a personal loan with a score of 650. But you will be charged high-interest rates. It is best to start improving your credit score and maintain it above 750 to get a personal loan at lower interest rates.
Q. How to build my Credit Score with a Personal Loan?
A. You can improve your score by repaying all your past debts and making payments on time using your loan.