A Credit score is a three digit score given to each individual with a credit record. It’s a score generated by the credit bureaus to determine your creditworthiness. It is calculated based on basis of your repayment record, credit history, and credit utilization etc. A higher credit score indicates a lower risk for lenders, making it easier for them to approve for credit products such as Personal Loan, Credit Card, and Home Loans
Can taking a personal loan affect your credit score?
Yes, applying for a personal loan will impact your credit score. Impact may be either positive or adverse as per your loan handling.
Positive Impact:
- If you make regular payments, your credit score is likely to increase over time.
- A personal loan improves your credit mix, a component in the calculation of the credit score.
- A well-managed loan helps you build a good credit score allowing you to apply for loans
Negative Impact:
- Taking out a personal loan triggers a hard inquiry, which can temporarily lower your credit score.
- High amounts of loans can also raise your credit utilisation ratio, which could damage your credit report negatively.
- Delayed EMI payment has a major impact on your credit score.
Pro Tip: Did you know that 35% of your credit score depends on payment history? Timely payment of your personal loan EMI is the best way to increase your credit score over a period of time.
How Personal Loan Repayments Impact Credit Score?
Your credit-worthiness is dependent on timely EMI payments. Here’s how:
- On-time payments will increase your credit score since it signifies good financial traits.
- Late payments or missing EMIs can bring down your score and invites penalties. Single missed EMI can deduct 50-100 point from your score.
- Prepaying or foreclosing without penalty can also cut down on debt and boost your credit score.
- Successful completion of personal loan tenure in its original tenure boosts credit profile makes loan approvals in future more easy.
Expert Opinion: It is said that consistent and on time EMI payments contribute about 35% in overall credit score, hence it is the most important factor.
The Effect of Loan Defaults on Your Credit History
Loan Defaults happen when borrowers miss out their personal loan EMI payments for more than one year. Defaults have a very negative impact on your credit score and future loan opportunities.
Impact of Loan Defaults in Credit Score
- A single loan default can harm your credit rating by 100-150 scores, making it challenging to secure additional financing from the future loans.
- Default is reported in your CIBIL report, thereby lowering of your CIBIL score.
- Lenders could then sue for the unpaid dues which can emphasise the poor creditworthiness even further.
- Borrowers with negative credit history may be charged a higher interest rate on future credit products.
How to Avoid Loan Defaults?
- Plan your expenses before getting into a loan so you can assume the payments.
- Make use of the auto-debit facility for EMI payments to avoid delay.
- If you’re experiencing financial struggles, consider with your lender restructuring the loan.
Interesting Fact: A report by CRIF Highmark and Digital Lenders association reported a 44% increase in delinquencies among personal loan borrowers
Can a Personal Loan Improve Your Credit Score?
Yes, personal loan can do wonders for credit score when handled correctly. Here’s how:
- Being regular in paying EMI enhances your credit history and thereby credit score.
- Carrying both secured (home loan, car loan) and unsecured (personal loan, credit card) loans improves your credit profile.
- The longer your credit history, the better your credit score. Borrowing a personal loan and returning it timely is good to your credit history.
- Consolidation of credit card debt through a personal loan lowers your credit utilization ratio, which improves your score.
Did you know? Nearly 60% of the people prefer Personal Loan to consolidate multiple debts
How Multiple Loan Applications Affect Your Credit
Having many loan applications within a short time frame damages your credit rating. Here’s why:
- Getting reviewed when you apply for a loan causes a minor dip in your credit score.
- The practice of submitting several loan applications shows a financial struggle which lowers your acceptance likelihood.
- Taking out multiple loans at once will make you look more deeply in debt to potential lenders which reduces the loans you can get later.
Pro Tip: Try a loan aggregator or pre-approved loan system that run only soft inquiries when you need to see various loan options.
Tips to Minimize Negative Impact on Your Credit Score
Follow these best practices to ensure that taking a personal loan does not negatively These actions will help you prevent taking a personal loan from damaging your credit score.
- Borrow money wisely and take a personal loan only when your regular EMIs are easy to maintain.
- Look at various loan offers to find a loan product with affordable rates and easy repaying options.
- Set automatic payments for your EMI to ensure you stay on top of your loan payments.
- Use personal loans wisely and keep your credit use at a minimum.
- Apply for loans only occasionally to limit hard credit checks.
Best Personal Loan Practices for Credit Health
Follow these effective ways to protect your credit score when you handle personal loans.
- Your application for loans will have better results when you keep your credit score higher than 750.
- Take the minimum amount of personal loan funds that support your current needs and goals.
- Regular reviews of your credit report help you find and correct score errors in your CIBIL history.
- Handle personal loan debt consolidation carefully by swapping high-interest debt only when it shrinks your total debt load.
- Make larger EMI payments whenever you can to reduce the length of your loan and save money as well as improve your financial standing with lenders.
Conclusion: Should You Take a Personal Loan for Credit Building?
Your ability to handle a personal loan will make it either increase or decrease your credit score. Using personal loans correctly can help you build better credit history and grow your credit types without hurting your financial rating. Your credit score will take substantial damage when you handle personal loans poorly by missing payments or taking on too much debt.
Final Thought:
A personal loan can help you construct a strong credit record when you use it sensibly. Make sure you pay your credit installments on schedule to maintain your credit standing. Make smart use of a personal loan to combine debt and strengthen your financial situation. Building a strong credit score requires responsible management of personal loans
