In India’s ever-evolving credit distribution landscape, personal loans have emerged as a strategic tool not just for meeting financial needs and aspirations such as health, education, medical expenses, home renovation, etc, but also for boosting and enhancing the creditworthiness of borrowers.
When managed sensibly, personal loans can positively influence your credit score and your overall credit profile. Hence, if you want to secure a favourable loan with fair terms, conditions, and interest rates, lenders carefully consider these factors.
The sole objective of the lender is to ensure that the borrower is capable of repaying the loan with negligible chances of defaulting.
Five ways a personal loan can affect your credit score positively:
1. Timely repayments strengthen credit history
Punctual and consistent repayment of personal loan EMIs contributes to a positive credit history. Payment history is an extremely reliable factor in determining one’s creditworthiness.
It accounts for a substantial portion of your credit score, and demonstrating reliability in this area can improve your score. Therefore, focus on developing a consistent and clean repayment history to keep your credit score high.
2. Diversifying credit mix enhances score
If you can strategically plan and incorporate a personal loan into your credit portfolio, it will immensely benefit your overall credit diversity. This also boosts your credit mix and is a factor in credit scoring models.
A well-diversified credit profile consisting of both secured and unsecured loans, credit cards, etc, indicates financial stability and responsibility if it is accompanied by a reasonably long history of consistent EMI payments.
3. Reducing credit utilisation ratio
Focusing on using a personal loan to consolidate your high-interest debts, such as credit card balances, can lower your credit utilisation ratio. The percentage of available credit you are using is a crucial factor here.
For example, if you have a credit limit of ₹1 lakh, you should not use more than ₹30,000 of this credit limit. Your credit limit usage must be less than 30% of your total credit limit. A lower credit utilisation ratio is favourable and can improve a credit score.
4. Establishing longer credit history
If you carefully manage a personal loan over its tenure by paying EMIs on time, and continue this for years, then this contributes to a longer credit history.
A lengthier credit history provides more data on your borrowing behaviour. This can positively influence and impact your credit score. Such a practice, hence, should always be encouraged among borrowers.
5. Facilitating future credit access
Responsible personal loan and credit card management can result in a higher credit score. This further boosts your eligibility for future credit and loan applications.
Lenders are more than likely to offer loans and credit cards at competitive rates to borrowers with strong credit profiles, high credit scores and a respectable repayment history.
This means you should never miss your loan EMI payments and credit card bills. To facilitate this, you could set up an auto-debit facility so that no payments are missed even by mistake.
The idea here is simple. You should deliver consistent repayments to display efficient loan repayment behaviour. This will help you with future loans and credit card applications. On the other hand, loan defaults and missing credit card payments can have serious legal and financial complications.
Conclusion
When used judiciously and efficiently, personal loans can even serve as a catalyst for boosting and improving one’s credit score and overall financial health.
On your part, you must ensure timely repayments, maintain a diverse credit mix and manage debts efficiently.
Therefore, by diligently following these points, borrowers can leverage their personal loans to boost their financial resources and overall credit profile. That is why it is crucial to approach borrowing with a strategic mindset to reap glaring benefits through personal loans.
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