Using Personal Loan to Improve Credit Score

Whenever a personal loan is availed from a financial institution such as a bank or NBFC, your loan repayment track record is reported to the credit rating institutions. The credit score of any individual is an estimate of their repaying ability for the amount borrowed.

A credit report will comprise complete details of your credit history from various lenders and products and your loan repayment information. Loans should be availed only when the need for them is justified. Along with the desire and capacity to repay them properly. Often numerous loans, rotating credits, skipping EMIs, all of these affect credit score negatively thus bringing it down remarkably.

A credit score affects the eligibility of a person to borrow more in the future. If one had borrowed in the past for a trivial reason and has been unable to repay thereby built up a bad credit report, he would not be able to borrow in the near future, even if a genuine need arises.

Additional Reading – Tips To Get Your Dream Credit Score

How to use a personal loan to improve the CIBIL score

Apart from other benefits, a personal loan is a great way to improve the credit score for any individual. Your credit score is a numerical representation of your creditworthiness as a person. The credit score is determined by credit bureaus based on the credit history of an individual.

CIBIL Score –

The CIBIL (Credit Information Bureau India Limited) is India’s first Credit Information Company which gathers and keeps records of an individual’s credit behavior. Generally, all financial institutions are supposed to report all the financial activities of customers to CIBIL, which are then maintained as records. This information is documented as a numerical score ranging from 300 to 900. The higher credit score improves the chances of getting approval on loans.

If you have a low credit score the chances of getting a loan approved are largely diminished. You can opt for a personal loan to help you boost it.

Personal Loan can help in improving CIBIL Score

Let’s understand how a personal loan can help you in increasing your credit score.

• Regular and uninterrupted payment of EMIs is obviously the simplest way to boost your credit score. Clearing your EMI payments before the due date, proves you as financially disciplined, which results in a boost of your credit score as well.
• When you refinance a credit card loan with a personal loan, it impacts positively on your credit score. Thus your credit score increases when you consolidate your higher-interest loans to a lower interest loan. And such financial activities areas the signs of an economically efficient individual, thereby the credit score will increase.
• A financially sound individual, with a substantially good credit score, would typically have a mixed bag of different types of credits, including both revolving and installment loans. If you have more credit cards and lesser installment loans, it will impact negatively on your credit score. A personal loan being an installment loan can be helpful in improving the credit score.
• High Credit Utilization Ratio

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Higher usage of your credits will impact your credit score negatively. If the credit utilization ratio is high, it leaves a question mark on your scores. The credit utilization ratio is the ratio of what you currently owe to a lender and the total credit available to you. In such instances too, a personal loan will help you out. The added extra credit will help you to lower the utilization ratio and boost your credit score.