How does taking a Personal Loan affect your credit score?

Whether it is funding higher education, sharing the expenses of a wedding, or helping you sail through an unanticipated emergency, a personal loan can be a helpful way to finance many expenses that you can't afford in one go. However, contrary to popular belief, taking a personal loan does not automatically have a detrimental effect on your credit score.

Your bank assigns you a credit score based on your credit history, which has a bearing on your financial journey. 

So, what is meant by Credit Score?

Simply put, a credit score is a way that a financial institution understands an individual’s financial activities to gauge how much credit and at what rate can be lent to them. It’s the ‘street cred’ that you carry with banks. Your individual credit score will be viewed by all institutions alike and reads like an index of all your major financial activities. 

Based on several factors, your credit score can increase or decrease. As long as you have a steady stream of income and diligently repay all loans, you will be rewarded with a healthy credit score.

Check out the factors that affect how a credit score is calculated - 

1. Credit utilisation - It is a comparison between the amount of credit you've been lent and the value you've already used. The higher this figure, the better is their credit score. 

2. Amount of debt - Another factor is the amount of debt an individual is in and the rate at which they repay it. Here, the credit score will increase with the increase in debt but only up to a point after which the credit score will be negatively affected.

3. Types of loans - Different loans generate different credit scores, and included in this calculation is also the duration of the loans.

4. Length of credit history - Generally, the longer the time, the better it is for a credit score.

Personal loan & its relation to credit scores
 

A personal loan is different from loans such as home or car loans as no collateral is offered to cover a personal loan. This means that you don't have to provide any security or have a co-signee to avail of a personal loan. Banks offer personal loans at their own discretion, based on the creditworthiness of the borrower. Thus, it is important to prioritise a payment strategy to repay your personal loan in time. 

Whether it is to fund a vacation or take care of unplanned exigencies, IDFC FIRST Bank offers flexible personal loans with instant approval of credits up to Rs. 10 lakhs through FIRSTmoney with an option to withdraw funds unlimited times or in one go, depending on your financial needs. This means, you pay EMIs only on the funds you use and not on the total approved limit. What makes this line of credit unique is the flexibility of fund uses and zero foreclosure charges, offering you immense affordability to close your loans whenever you wish to.  

You can also check you EMI amount with IDFC FIRST Bank’s personal loan EMI calculator. Simply enter your loan amount requirement, period for which you want. Taking a personal loan may initially affect your credit score negatively. But, if prompt payment of the loan is made in a timely fashion, then the credit score becomes healthy again. 

Charting out a repayment scheme that helps customers repay the loan promptly takes precedence for good banks. IDFC FIRST Bank offers you the convenience of pocket-friendly EMIs with flexible repayment tenures of up to 60 months. You also have the choice to make full payment before the loan tenure ends without paying any extra charges, and further transfer your personal loan or credit card balance, and indulge in amazing benefits. 

They also have a flexible and accommodating personal loan eligibility criteria. To apply for instant personal loans through FIRSTmoney, all you need is a stable salary, a credit score of 750 and above, and a PAN card during the Video KYC process And voila, you can be on your way to live your life to the fullest. 

Personal loans do affect credit your score, but with timely and prompt repayment, it will be in a positive manner. Always keep in mind the personal loan interest rate at which you have availed the loan. The personal loan eligibility criteria is another factor to be kept in mind. IDFC FIRST Bank provides a range of options for a personal loan in their instant loans app, along with a customised repayment scheme, which will have the best effect on your credit scores in the long run.




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.