How To Build Your Credit Score With A Personal Loan

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Last Updated on March 10, 2024 by admin

Financial planning is a crucial aspect of our lives but one that is often overlooked due to busy schedules, or simply because a lot of us are quite unaware of proper money management. Having a good credit score is essential but establishing one can be difficult for those who are already in debt. Although it may seem counter-intuitive to use Personal Loans to enhance your credit score, it is one of the most common and effective ways to do so. Here are some tips for using Personal Loans to raise your credit score quickly and effectively.

Benefits of Getting a Personal Loan on Your Credit Score

1. Reduce Debts

If you haven’t made payments on time and have a history of missing monthly instalments, your penalty interest, as well as the interest on any outstanding credit card balances or loans, will be high. You can reduce such loads and raise your credit score by obtaining a Personal Loan to  pay off your bills.

2. Debt Consolidation

Combine your debts using a Personal Loan to lower the interest you have been paying on your existing loans and ensure that EMIs are paid on time.

For instance, if you have four credit cards and each had debt on it, you will make four monthly payments at four different interest rates. The four unpaid balances can be paid off easily with  one single repayment with the help of a Personal Loan, which is always preferable in comparison to four different repayments.  

3. Build a Credible Payment History

Repaying Personal Loans on time is another simple and efficient approach to raising your credit score. Your payment history becomes solid and reliable when you make the EMI payments on time and within the deadline. It will undoubtedly have a positive impression on the calculation and evaluation of your credit score. In addition, make sure you pay off the entire monthly instalment to maintain raise your credit score. Connect with Poonawalla Fincorp if you’re searching for the best interest rates for Wedding Loans in India.

What You Should Beware of When Availing a Personal Loan to Improve Your Credit Score

Avoid Submitting Too Many Personal Loan Applications

If you want to use a Personal Loan to consolidate your debts, pick a financial partner that offers a loan that will work with your budget. A Personal Loan denial can lower your credit score and overall prospects of getting a loan, so applying for multiple Personal Loans could boomerang.

Since your main goal is to pay off your obligations, pick a Personal Loan amount you can comfortably afford to return  the agreed-upon instalments. You can also use an online EMI calculator to determine your monthly instalments. 

Calculate Loan EMI

Once you’ve determined the EMI, ensure it doesn’t exceed 40–50% of your net monthly income. Avoid a Personal Loan foreclosure by making timely payments throughout the loan’s tenure if you want to raise your credit score. You will also have a lengthier credit history which will help maintain a good credit score.

Choose Your Financial Partner and Loan Amount Carefully

Compare the financial institutions that offer Personal Loans for different purposes. For instance, if you want a loan to fund a wedding, then select a lending company with a good reputation for providing Wedding Loans in India with affordable interest rates.

How are Credit Scores Calculated?

The following factors determine your credit score:

Credit HistoryBoth the consistency and history of your loan repayment impact your credit scores.
Loan DurationThe length of your loan or credit relationship with a Financial Partner is analysed. If you have made consistent payments, your chances of having an excellent credit score increase.
Total DebtsYour credit score is directly affected by the total number of debts and credit obligations. A pending balance doesn’t look good and impacts the score negatively.
Type of Loan takenConsistently missed payments will directly influence your Personal Loan; compared to a few missed payments on a credit card.

A Personal Loan might help you build a strong credit profile and raise your credit score. Your available credit to debt ratio, also known as the “utilisation ratio,” which accounts for 30% of your credit score, is improved by a Personal Loan.

The most crucial step in obtaining a Personal Loan is finding one with the best interest rate. Today, many financial institutions and NBFCs are offering Personal Loans at attractive interest rates. One such financial partner is Poonawalla Fincorp. However, remember that this credit repair approach has drawbacks if you do not make mindful choices.

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