Nowadays, you do not need to worry at all in case you do not have sufficient funds to plan your wedding, pay your hospital bills, or take your family on a trip abroad.
In this new world of finance, easily accessible funding is available ‘in disguise of personal loans.
But, being in the category of unsecured loans, the approval of these loans depends on two critical factors, your credit score, and monthly income. As a usual practice in India, banks/NBFCs rely on the credit scores prepared by CIBIL (Credit Information Bureau India Limited) to evaluate your eligibility.
This 3-digit number, termed as CIBIL Score, can summarize your entire credit history for a particular duration as well. Here is how credit scores are categorized by most lenders.
If you have an excellent or good credit score, it conveys to your potential lenders that you are a better credit risk proposition for them. In such a case, a lender won’t hesitate to grant credit to you on short notice, if you are in urgent need of funds to address a financial exigency. On the contrary, with a ‘not-too-impressive’/poor/bad credit score you may not be able to get the best personal loan approved.
Even if you managed to get it approved somehow, you may be charged a higher interest rate with unfavorable terms and conditions, as compared to the applicants with excellent credit scores.
You don’t quite know when you will require credit in your life. Maintaining a good credit score makes it much easier for you to get credit, as and when you need it. Therefore, it is highly imperative that you should keep a ‘hawk-eye’ on your credit score and find out ways to improve the same.
So, this was in brief about credit score and its importance in the current financial marketplace. But are you aware of the fact that you can even use your existing personal loan to improve your credit score?
Not really? We will tell you how!
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Your Credit Score goes Higher Every Time you Pay your Personal Loan EMIs on Time
Please bear in mind that past payment records of your existing personal loan EMI can influence the credit score either positively or negatively. If you have defaulted or there is a lapse in your payments, your credit history gets impacted negatively and your credit score gets a beating. On the other hand, if you make timely payments, the potential lender gets the impression that you know how to handle your credit and you are a responsible borrower.
This habit of making payments on time also ‘informs’ the lenders that providing credit to you will not be a risky proposition at all. If, on any given month, you are not in a position to make timely payment of your EMI, please inform the same to your lenders well in advance. Alternatively, you may pay at least the minimum amount before the due date and negotiate with the creditors, so that they do not inform such a ‘one-off’ lapse in your credit report.
Even if you do not have a personal loan at present and want to improve your credit score, it will be a great idea to avail of a personal loan and start paying the EMIs strictly on time. As in the case of a personal loan, the amount is broken down into equal installments, you do not feel the financial strain and it keeps you in reasonably good shape to pay the EMIs on time.
Thus, you may continue making timely payments for a prolonged duration and it will ‘stamp’ a good reflection on your credit profile. This is perhaps, the easiest way to improve your credit score.
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Pay Off Your Outstanding Debts by Availing of a Personal Loan
If you have too much debt on your plate and are struggling to handle these, it impacts your credit report negatively. It also conveys to potential lenders that you are not efficient in handling credit. A personal loan can come to your rescue if you are having a tough time paying your debts off. A personal loan will take care of the funds you require to clear off your debts sooner than you can afford otherwise. Clearing off outstanding debts will improve your payment history a quick time, and, eventually, will improve your credit score.
After the outstanding debt is off your shoulders and your credit score goes to improve, you will be in a much better shape to avail yourself of new credits as and when you need them, with improved terms.
You should Consider the Following Points while Getting a Personal Loan to Improve your Credit Score
Do not Apply for Multiple Personal Loans
The thumb rule for applying for any credit is that you should go for it only when it becomes absolutely necessary. If you apply for multiple or simultaneous personal loans, you will be deemed as ‘credit hungry’ by potential lenders. Too many credit applications will invite too many hard inquiries into your credit report.
Having too many hard inquiries within a short span of time will have a negative impact on your credit profile. Also, such hard inquiries may go on to reflect on your credit report for as long as 2 years. If you think from another angle, having too much credit at your disposal may tempt you to overspend. This way, you will accumulate more debt and may struggle to handle your credit all over again.
Do not Foreclose your Personal Loan Prematurely
Please be aware of the fact that a lender looks into both your long-term and short-term creditworthiness. Even if you are financially sound enough to foreclose your personal loan at any point in time, we would advise you against this, particularly when you are looking to improve the credit score through your personal loan.
At best, if your financial condition permits, you can consider doing a bulk prepayment to bring the personal loan EMI down, while keeping the loan tenure the same as before. This will give you more chances to continue making timely payments with a lower EMI every month. It will surely improve your credit score in the long run.
Avail Only as much Personal Loan Amount as you Require
Do make sure that you apply only for the personal loan amount you require. Availing of a bigger personal loan amount will obviously mean bigger EMIs for you. If your EMI goes beyond your affordability, it will put an undue financial strain on your regular budget and you may struggle later on to pay your EMIs on time.
It will only impact your credit score in a negative way, as we have seen before. This is very important if you want your Aditya Birla personal loan to improve your credit score.
Do not be in an Extreme Hurry to Avail more Credit
As you are clear by now, if you start paying your personal loan EMIs on time, your credit score goes up the ladder. Naturally, your credibility and repayment potential increase in the eyes of potential lenders and they will be ‘queuing up to give you more credit.
Don’t be surprised if you start getting seemingly irresistible offers and you find it increasingly hard enough to avoid them. But you would be better off not falling into this ‘debt trap’. As discussed earlier, applying for multiple credits in a short span of time can only hamper your credit score.
In conclusion, we reiterate that you can use a small personal loan to improve your credit score and to pay off/consolidate your debt as well. You can pay off your existing higher-interest debts by acquiring a personal loan with a lower interest.
Therefore, we would advise you to play your cards well and use comparative insights to avail a low-interest personal loan. In addition to it, a personal loan with an affordable payment option and a flexible loan tenure will make your task easier in paying the EMIs on time and improving your credit score in the process.