When you approach various lenders for a loan, the first common check is your credit score to decide if you can repay the loan on time. As a result, you become aware and look for ways to improve credit score if it doesn't align with the loan providers' expectations.
However, one misconception is that getting a personal loan can have a negative impact on the credit score. But that's not true! If you use a personal loan the right way, you can improve your credit score. So, find out in this blog how a personal loan affects your credit score.
A credit score, ranging from 300 to 900, serves as an indicator for financial institutions on your repayment reliability. It considers your payment history, credit management, and other factors to determine your score.
A score near 300 signals a high risk (It can be someone with a limited borrowing history), making it challenging to avail credit. Conversely, a score near 900 signifies strong repayment ability. Typically, a credit score above 750 is considered good.
The FICO® scoring model looks at five factors, each affecting your credit score by a certain percentage. Together, these factors calculate your credit score.
Financial institutions evaluate your repayment history to determine personal loan approval. They aim to confirm your consistent and timely fulfilment of payment obligations.
Moreover, a track record of missed or delayed payments can raise red flags. These trends suggest a greater likelihood of defaulting on a new loan, prompting potential modifications to the loan terms. It could result in high interest rates or, in certain instances, outright rejection of the loan request.
Credit utilisation reflects your credit management responsibility. It involves assessing the ratio of your available credit to the credit you've utilised. Lenders gauge your creditworthiness based on this utilisation ratio.
A high credit utilisation ratio, indicating that most of your available credit is being used, can trigger concerns as it implies an excessive dependence on credit.
Conversely, financiers view a low credit utilisation ratio positively when you use only a small portion of your available credit. It shows that you're not overextending yourself financially and managing your credit responsibly.
Your credit history reflects the length of time you've been actively utilising credit accounts. Think of it as a financial report card offering additional insights for lenders to assess your trustworthiness in debt repayment and management.
If you've been responsibly managing credit accounts for years, a lengthy credit history reflects your track record of making timely payments. But, if your credit history is relatively short, lenders might see you as a risky borrower and be more cautious about giving a loan to you.
It refers to different credit accounts you hold, such as credit cards, loans, and mortgages. This factor can influence your credit score. Financial institutions prefer having a good credit mix because it shows your responsible borrowing behaviour.
A good credit mix can moderately enhance your credit score, but not having different types of credit may not make a huge difference. Also, getting a new loan probably won’t improve your credit score. So, don’t open multiple credit accounts at once, as it can lower your score because of more credit history checks or inquiries.
When you open a new credit account, it can affect how much you owe and make your credit history seem shorter. This might happen because the new account brings down the average age of all your accounts and lowers your credit score.
Applying for a personal loan or any credit usually means the loan issuer checks your credit report with a hard inquiry for around two years. If there are many hard inquiries, it can lower your credit score. Financiers might think you're actively seeking credit, which could seem risky to them.
Once you get a personal loan, how you manage it determines its impact on your credit score. Timely repayments improve your creditworthiness, while late or missed payments can have adverse effects.
Platforms like Quid match you with RBI-approved lenders to help you find the most suitable personal loan with competitive rates and flexible repayment options.
Taking out a personal loan and making timely payments can improve your credit score. Your consistent repayment behaviour shows reliability to creditors, possibly leading to a gradual boost in your credit score over time.
Before you borrow to improve your credit score, ensure you can afford the monthly repayment and that the loan terms are favourable. Create a repayment plan and stick to it to reap the credit-building benefits of a personal loan.
Paying your bills on time is one factor that could improve your credit score. However, checking your credit card balances is important, as a high credit utilisation ratio can impact your credit score.
Maintaining a zero balance will not negatively impact your credit score but will not contribute to its increase as well.
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