Can a personal loan for students help them build credit?

Amit, a 21-year-old engineering student, has been performing well in his studies and is eager to take an additional certification course to enhance his career prospects. He also needs a new laptop for his coursework but lacks sufficient savings. When he applied for a credit card, he was denied due to his lack of credit history.

Amit now wonders whether taking a personal loan for students could help him establish credit and manage his immediate expenses. Like many students, he was unsure how borrowing could impact his financial future.

If you find yourself in a similar situation, let’s walk through the benefits and risks of using personal loans for students to build credit.

What is a credit score?
 

To understand how a personal loan for students can impact your credit score, let's first break down what a credit score is. It is a three-digit number that reflects your borrowing history. It helps lenders (like banks or financial institutions) determine how risky it is to lend money to you. Scores range from 300 to 900—the higher your score, the better your chances of securing loans at favourable rates. 

Why does it matter? A good credit score opens doors to lower interest rates, higher loan amounts, and faster approvals. For students starting their financial journey, building a solid credit profile can pave the way for future opportunities like car loans or mortgages.

In India, credit scores are provided by four major credit bureaus –

1. TransUnion Credit Information Bureau India Limited (CIBIL)
2. Experian
3. Equifax
4. Credit Information Bureau India Limited (CRIF) High Mark

Among these, CIBIL is the most widely used. When you apply for a loan, lenders often check your CIBIL score to assess your repayment capability. Your CIBIL score is calculated based on several factors –

1. Payment history
 

Timely payment of your loan instalments will positively impact your CIBIL score, while delays or missed payments can lower it. For instance, a 30-day delay may reduce your score by 100 points.

2. Credit exposure
 

Keep your credit utilisation—the percentage of credit used to a minimum to improve your credit score. For instance, if you have a credit limit of ₹1,00,000, try not to use more than ₹30,000.

3. Credit type and duration
 

To improve your credit score and prove financial responsibility –

a) Focus on establishing a long credit history

b) Maintain a mix of secured and unsecured loans

4. Other factors
 

Whenever you apply for an instant loan for students, lenders conduct a hard enquiry— a formal request to review your credit report—which can temporarily lower your credit score. Too many enquiries in a short time may lower your score. It’s wise to apply for credit only when necessary.

Understanding these factors will help you manage your finances responsibly, and improve your credit score, while also securing a personal loan.

The potential effects of personal loans
 

When you take out a personal loan for students, you must understand both the potential upsides and downsides of your credit score. Let’s visit Priya’s scenario.

After careful consideration, Priya decided to take out a small personal loan from IDFC FIRST Bank. She is drawn to the flexibility of the loan’s repayment terms and the bank’s reputation for offering loans. She was also drawn to the reasonable interest rate, starting at just 10.99% p.a. and flexible repayment tenures between 9 and 60 months.

Over the next 12 months, Priya paid her monthly instalment on time. As a result, her credit score gradually increased. By the time she completed her studies, Priya had not only successfully paid off the loan but had also built a positive credit history. This made her further eligible for a car loan at an attractive interest rate.

Priya’s responsible borrowing helped her understand the importance of managing credit, and she felt more confident about her financial future.

The positive effects of personal loans for students are summarised here –

1. Building credit history
 

If you’re new to credit, taking a personal loan for students can help establish a credit history. As you make timely payments, you demonstrate to lenders that you are reliable, which can gradually improve your credit score.

2. Improving credit mix

Having a personal loan for students adds diversity to your credit portfolio, showing lenders that you can handle different types of loans. This can positively impact your credit score.

3. Lower credit utilisation
 

If you use the loan to pay off high-interest debt, your credit utilisation rate will decrease, which could help improve your score.

4. Potential for better loan terms in the future
 

A higher credit score makes qualifying for future loans (like a car loan or mortgage) with lower interest rates easier.

However, you must also be careful of –

1. Risk of debt
 

You could be in debt if you don’t manage your loan responsibly. Missing payments or accumulating too much debt can hurt your credit score.

2. Short-term drop in credit score
 

Initially, taking out a personal loan for students may cause a slight dip in your credit score due to the hard enquiry from the lender. However, this will likely be temporary if you continue to manage the loan well.

3. Late payments
 

If you miss a payment, it will negatively impact your credit score. A missed payment can remain on your credit report for up to seven years, so staying on top of your payments is important.

FIRSTmoney, a smart, instant personal loan, helps you reduce the risks and maximise the benefits of personal loans for students with these features –

1. Instant loans up to ₹10 lakhs for essential expenses and credit building
2. 100% digital, paperless application for easy access to funds for students and young professionals
3. Flexible repayment plans from 9 to 60 months to suit your finances and reduce missed payments
4. No foreclosure charges for early repayment, encouraging responsible borrowing and improving credit
5. Competitive interest rates from 10.99% p.a. for affordable and comfortable repayment
6. Quick disbursal of funds directly to your account for efficient management of urgent needs

What if you have no income? How to borrow responsibly
 

Not all personal loans for students have the same effect on your credit score. The following factors can influence how a loan will impact your financial standing.

1. Income and repayment capacity
 

Repaying the loan could be challenging if you do not have a regular income. Some students opt for part-time jobs to manage the loan responsibly.

2. Co-applicants can help
 

Many banks allow students with no income to apply for a personal loan with a co-applicant, such as a parent or guardian, increasing the chances of approval and offering better interest rates.

3. Alternative options
 

If you're unsure about taking a personal loan, consider a bank student loan, which is specifically designed for tuition and other education-related expenses. These often have lower interest rates and flexible repayment options.

Essential tips to keep your credit score healthy and growing
 

To make the most of personal loans for students and ensure they positively affect your credit score, you must adopt responsible financial habits, such as –

1. Make timely payments
 

This is the golden rule. Always pay your bills on time, every time. Set up reminders or automatic payments to avoid missing deadlines.

2. Avoid maxing out your loan
 

Keep your loan usage within reasonable limits. Taking out a personal loan for students is useful, but borrowing more than you need can lead to unnecessary debt.

3. Monitor your credit report
 

Regularly check your credit report to ensure there are no errors. You can obtain a free copy of your credit report once a year from each major credit reporting agency.

4. Keep debt under control
 

Try not to take on too much debt. Avoid taking multiple loans immediately, and focus on paying off existing debts before considering new ones.

5. Avoid opening too many accounts
 

Opening multiple credit accounts in a short period can raise red flags for lenders.

Is a personal loan for students right for you?
 

Taking out personal loans for students can be a practical way to manage education-related expenses while building your financial profile—if done responsibly. By understanding how loans impact your credit score, choosing the right lender—IDFC FIRST Bank and following best repayment practices, you can set yourself up for long-term success

Curious about where you stand financially? Check your credit score today and explore responsible borrowing with FIRSTmoney.