Can getting a Personal Loan improve your credit score

Personal loans can help in taking care of multiple expenses. However, applying for such loans can also help in improving your credit score. 

A personal loan does not require borrowers to provide any type of collateral. This makes such loans an ideal option for those who are in need of financial assistance. However, a lot of people do not realise that they can effectively improve their credit score by applying for a personal loan. Read the following article to learn how you can give a boost to your credit score by taking a personal loan:

What are the benefits of a Personal Loan?

Let us begin by understanding the various benefits of availing of a Personal Loan in India today. Here are the benefits of opting for a personal loan:

·  Low interest rates
 

A major benefit of availing of a personal loan is its low interest rate. IDFC FIRST Bank offers the most affordable and competitive interest rates on its personal loans that can help you tackle any financial emergency and repay the loan easily.

·  Quick loan processing
 

You need not visit a bank branch anymore to get a personal loan. Net banking services offered by banks and mobile banking apps can process your digital personal loan request very quickly. 

·  Planning your repayment
 

Often enough, borrowers tend to apply for a personal loan without planning for their repayment in advance. This leads to the borrower finding it difficult to repay their personal loan in time. IDFC FIRST Bank resolves this problem for you with its personal loan EMI calculator. You can now know the details of your repayment cycle in advance to plan for your personal loan repayment.

How to increase your credit score by taking a Personal Loan?
 

The idea of taking a personal loan to improve your credit score sounds counter-intuitive at first; since a personal loan, after all, is an assumption of debt. However, there are three major ways in which you can improve your personal loan credit score through your personal loan:

·   Focus on building a good payment history.
 

You must always pay your personal loan EMIs (Equated Monthly Instalments) on time in order to build a good payment history. This can positively affect your credit score; especially if you make your EMI payments in full every month.

·  Reduce your credit utilisation.
 

If you already have a credit card, you might have come across the term ‘credit utilisation ratio’. Simply put, it is the percentage of your total available credit that is currently being utilised. If you avail a personal loan along with a credit card, you can reduce your credit utilisation score, which will in turn increase your credit score.

·  Diversify your credit mix.
 

You might have heard of diversification in the context of investments. However, it is also important to diversify your credit mix. A credit mix is a collection of all the types of loans that you have taken and the credits that you are currently repaying. A personal loan can positively affect your credit score by diversifying your credit mix.

How can a Personal Loan worsen your credit score?
 

Let us also take a look at the ways in which a personal loan can worsen your credit score. In this section, we mention certain particularly bad practices that can lower your credit score.

·  If you already have a very low credit score, it is not advisable to avail of another. Banks often issue what is called a ‘hard inquiry’ on your credit report while assessing your personal loan application. A hard inquiry on your credit report is not good for your credit score.

·   If you already have a lot of credit card debt to repay, it is not advisable for you to avail a personal loan. Doing so could negatively impact your credit score by which lenders could consider you incapable of assuming debt in the future.  

What is the best time to apply for a Personal Loan?
 

We delineate three scenarios in which you could think of applying for a personal loan.

·  During emergencies:

A digital personal loan can help you find your way out of a financial emergency such as a medical emergency in the family or a family crisis.

·  For consolidating high-interest debt:

If, for example, you have a high-interest credit card that you wish to consolidate with a loan, you could do so through a personal loan.

·  To get a loan without collateral:

You might sometimes want to take a loan without pledging collateral. A personal loan comes in handy in this situation since it does not require you to pledge collateral.

We hope you have a better understanding of the ways in which you can improve your credit score through a personal loan. IDFC FIRST Bank offers instant personal loans at some of the best interest rates in the market.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.