Nowadays, a major emphasis on the credit score of the borrowers taking a personal loan is considered a vital factor by the lender. As a result, many young working professionals and self-employed individuals look for ways to improve their creditworthiness before taking a personal loan. A personal loan is a kind of loan that can be used for several reasons like buying an electronic gadget, debt consolidation, or home renovations is an example of taking personal loans.
What is a credit score?
To know how a
personal loan impacts your credit score, you need first to understand your credit score and how things get affected. A credit score is a numerical expression based on a level analysis of a person's credit files to represent the creditworthiness of an individual. CIBIL TransUnion, Equifax, CRIF High Mark and Experian are the bureaus that maintain credit reports.
Several factors can impact your credit score. Credit bureaus use many factors to evaluate your credit score in the following method:
- Credit history
- Credit utilization
- Number of accounts
- New credit lines
- Credit history length
The bureaus use their trademark algorithms to calculate the applicant's credit score. Therefore, applying for a personal loan can positively and negatively impact your credit score, as stated in this article.
How can a personal loan harm your credit score?
A personal loan can spoil your credit score in the following ways:
Applying for multiple loans
Most applicants see a dip in their credit score after applying for a new loan to close the old loan. When you apply for numerous loans, the lender performs a hard credit check to know your creditworthiness, including your payment history and other debts. This loan application may drop your credit score.
Multiple credit inquiries
A personal loan inquiry often done can result in hard inquiries on your credit report. Having too many inquiries on your credit report within a short period can impact your credit score.
Missed payments
When taking a personal loan, it will lower your credit score if you miss out on repayments. This is because the credit bureau agencies will analyze your payment history and this will impact your credit score negatively. In such situations, where you have missed out on the payment due to some personal reason, depending on your existing relationship with the lender, you can explain the reason for delayed payments.
How can a personal loan have a positive impact on your credit score?
While taking a personal loan, always keep in mind the below-mentioned factors for a better credit score:
Make loan payments on time
Missed or late payments are bad for your credit score. So timely loan payments will boost your credit score.
Automated repayments
The automatic loan repayment method works best for the late EMI payers because when you make an automated payment, you are telling the lender to deduct the set EMI on the set date that will automatically get deducted on the fixed date and boost your credit score.
Reduces your Credit Utilization ratio
Personal loan helps limit your credit utilization ratio. If your only source of credit has been credit cards, then adding personal loans will diversify your credit mix, and a diverse credit mix will positively impact your credit score.
Monitor your credit report
To know what impacts your loan and credit score, you should regularly check your credit report. You can request credit reports from credit bureau agencies without hurting your credit score.
Keep your old loans
Never close your old loan accounts for new loans. If your old loan reflects a good credit score, it will show your creditworthiness. The longer the presence of an old loan on your credit report with a good credit score record, the higher are the chances of getting a personal loan in the near future.
Bottomline
The more organized and responsible you get with your finances and personal loan account; your credit score will get impacted positively.
