How Do Personal Loans Affect Credit Score?
Your credit score is one of the most important metrics that financial institutions look at when granting you a loan or a credit facility.
The credit score calculated by TransUnion CIBIL is a three-digit numerical number ranging from 300 to 900 that denotes your credit worthiness.
The higher your credit score is, the greater your creditworthiness is deemed to be, and the greater the chances of you getting a loan at attractive terms.
However, if you’ve availed of an instant personal loan recently or are planning to do so in the near future, then you should know that personal loans can affect your credit score in many ways. Let’s take a look at these details.
How Do Personal Loans Positively Affect Your Credit Score?
Availing of an instant personal loan can have quite a positive impact on your credit score. How do you ask? Continue reading to find out.
1. It Helps You Build Credit History 2. Timely Repayment Boosts Your Credit Score
1. It Helps You Build Credit History
If you’ve never taken out a loan or a credit facility before in your life, you wouldn’t have a credit history. And as a result, your credit score might be low.
Since there’s effectively no record of your financial activity, lenders might be unwilling to offer you loans or other credit facilities.
One of the best ways to create a credit history is by availing of an instant personal loan and repaying the dues on time since all of the activities associated with it are reported to the credit bureaus.
This data is then used to calculate your credit score.
2. Timely Repayment Boosts Your Credit Score
When you take out a loan and continue to service it by making all your EMI payments on time without fail, your credit score gets a huge boost.
Such a good track record is usually viewed favorably by lenders, who are likely to be more inclined to grant you a loan or a credit facility thanks to the immense financial discipline that you’ve shown.
How Do Personal Loans Negatively Affect Your Credit Score?
Just like how personal loans can have a positive effect on your credit score, they can also negatively affect it. Here’s how.
1. It Can Add To Your Debt 2. Too Many Personal Loan Applications Can Bring Your Credit Score Down
1. It Can Add To Your Debt
If you already have too many debts on hand, availing of another personal loan can lead to your credit score taking a huge hit.
Lenders tend to view such behavior as irresponsible, and will usually not offer loans or other credit facilities to such individuals.
However, if the personal loan is taken with a view to consolidating debt rather than adding to it, then it might have a much more positive effect on your score.
2. Too Many Personal Loan Applications Can Bring Your Credit Score Down
When you make an application for a personal loan, lending institutions typically do a hard inquiry into your credit score to get to know your creditworthiness.
While a single hard inquiry is likely to not have any impact, too many of them in quick succession can lower your credit score. That’s why it is important to avoid making multiple instant personal loan applications within a short span of time. Moreover, you can make a card balance transfer if you suddenly need finances.
Conclusion
So, there you have it – the different ways through which a personal loan can affect your credit score. That said, if you’ve been a CIBIL defaulter, then all is not lost.
There are ways to avail a personal loan for CIBIL defaulters, through which you may still be able to get access to some much-needed funds.
However, it is always advisable for you to stay clear of any defaults.
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