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Sponsored: This is how personal loans can improve your credit score

In the current world of finance, there is easy access to funding in the form of personal loans.

   New Delhi     Last Updated: April 4, 2018  | 16:42 IST
This is how personal loans can improve your credit score

What do you do if you don't have sufficient savings and require additional funding to pay your medical bills, plan a wedding or take a family vacation? No worries. In the current world of finance, there is easy access to funding in the form of personal loans. You can apply for a personal loan to fulfill your financial needs.

What is a personal loan?

Personal loans are unsecured loans that don't require security or collateral. The loan amount can be used for any purpose at your discretion. A personal loan approval is based solely on your credit score and income. If you have a credit score of 750 and above, your chances of loan approval are higher. If you have a bad credit score, you can work on improving it. You may ask, why is it important to have a good credit score? Credit score indicates your ability to repay a loan. Therefore, lenders rely on credit score to determine your creditworthiness before processing your loan application.

Use your personal loan to boost your credit score

Personal loans and credit cards are 2 ways of building credit. Although credit cards are convenient, they come with high interest rates. Therefore, personal loan is a better choice for helping you build your credit score, provided you keep the following in mind:


Compare personal loan offers: 2 important things to look for in a personal loan offer is the interest rate and fees. Visit an online comparison portal to compare personal loan interest rates across top banks. Choose a lower interest rate personal loan so that you don't end up paying more in interest. Pick a bank that offers personal loan with lower processing fees and other charges. Thus, your overall personal loan cost will be lower.

Don't apply for multiple loans at the same time: Every time you apply for a loan, a hard enquiry is made and it reflects on your credit report. More number of hard enquiries can negatively impact your credit score. Avoid applying for personal loans with multiple lenders.

Review the loan agreement: Before signing the paperwork, read through the terms and conditions of the loan agreement carefully. Focus on the penalty clauses for delayed or missed personal loan EMI payments.

Decide on your loan amount carefully: First and foremost, assess your need for a personal loan. If the purpose of the loan is to build your credit and nothing else, then you can borrow a small amount. This way, you can build your credit and not worry about a having a huge debt.

Make your EMI payments on time: Delayed, partial or missed loan EMI payments can negatively affect your credit score. Whether it is a personal loan or credit card, your payment history plays a major role in determining your credit history and credit score. Use the personal loan EMI calculator to get a detailed loan repayment schedule for the chosen loan amount and tenure. Your monthly EMIs shouldn't exceed more than 50% of your salary.

Use personal loan for debt consolidation: The interest rate and EMI payments of a personal loan are lower than a credit card. Therefore, use your personal loan to settle your high interest rate credit card debts. Be frugal and keep your credit card usage to below 30% of the credit limit.

Keep your debts to a minimum: As your credit score improves, your eligibility for other types of loans will also improve. However, stay away from temptation. It is of course, important to maintain a balance between secured and unsecured loans in order to improve your credit score. But, don't rack up more debts by borrowing more. A high debt-to-credit ratio is bound to lower your credit score.

Avoid closing your loans prematurely: Lenders take your short-term and long-term creditworthiness into account. If you have the funds to close your debt before the end of your loan tenure, then pay a bulk portion of the debt without closing it prematurely.

In conclusion, you can use small personal loans to not only boost your credit score but also debt consolidation. A lower-interest rate personal loan can be used to pay off higher interest debts. As personal loans are installment loans, it has a fixed repayment term. Therefore, choose a personal loan with a lower interest rate, flexible loan tenure, and an affordable repayment option to build your credit.

Your medical bills will be taken care of by a relevant health insurance plan. You can purchase a car of your choice with a car loan and your life insurance policy provides financial protection to your loved ones in the unfortunate event of your demise or disability.  So, why don't you opt for a personal loan when you have a lot of personal needs to meet and let your savings untouched for future emergencies.

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