If you need to rebuild or even just start building your credit score, pursuing a Personal Loan is a great idea. With some financial institutions, you can apply for a personal online and get approval within minutes. For those of you who are looking to go for higher studies abroad, taking a Personal Loan for education is one of the best ways to fund your college expenses and start racking up your credit scores. These loans come at a very low rate of interest and you only need to start paying them when you get placed.
Read on to find out how to build a good credit score using a Personal Loan.
But first, let’s understand what a Personal Loan and credit score is and also get an insight into how they’re related.
What is a Personal Loan?
Personal Loans are also known as unsecured loans because you don’t need to provide any security against the amount borrowed.
A Personal Loan is an amount borrowed to meet the current financial needs. Individuals looking for quick and easy acquisition of an amount with low-interest rates and minimum documentation often resort to Personal Loans. You can check the eligibility for personal loan from online that will help to know about the what kind of the documents are required.
A Personal Loan can also be used as a marriage loan, home/office renovation, or starting a business.
What is a Credit Score?
A credit score is a numerical expression that reflects your creditworthiness. Any lender will do a thorough check of your CIBIL score before giving you a loan. It shows the bank how financially sound and capable you are of paying the loan in time. Credit bureaus keep a tab on your credit activities and a close scrutiny on your repayment and borrowing patterns.
How are Credit Score and Personal Loan Related?
Your payment history impacts 35% of your overall credit score. 30% is based on the total amount you owe and 10% is affected by the number of credit lines you’ve opened up recently.
Personal Loan initially impacts the amount you owe and the number of credit lines.
If you have a great history of making timely payments and managing debts then the effect on your credit score from a new credit line is lessened.
How do you Rebuild you Credit Score Using a Personal Loan?
It’s very common to improve your credit score using a credit card. Here are tips and hacks on how you can use a Personal Loan to build your credit score and make it strong.
You will have to follow only 3 things.
- Payment History: Keep a strong and trustworthy payment history. If you have been paying your loans in time it will make a positive impact on your CIBIL score. Before processing your application all financial institutions do an intensive search of your payment history. If you pay without skipping any EMI then banks consider giving you a loan.
- Prepayment: Personal Loans are easy to pay. Often you’ll find yourself with idle funds which can be used to make early or excess payments. This will give you a commendable credit score. Prepayment or excess payment reflects that you’re financially sound and banks in turn will have stronger faith in you.
- Outstanding Amount: The sooner you repay your loan, the better your credit score will get. Banks do a research on how long you’ve taken to pay off loans in the past. 30% or below is the best cut off for an owing amount; banks will happily sanction the loan to you.
What do you Do after Getting the Personal Loan?
There are two types of credits.
1) Credit Lines: this includes credit cards.
2) Installment Credit Lines: this includes loans such as car loans and Personal Loans.
When you get the Personal Loan amount, your first instinct may provoke you to spend the newly acquired funds. It’s a bad idea to do so. Use the loan amount to pay off your credit card bills and maintain a low owing balance on them. You may use the amount as a marriage loan or to cover any immediate expenses too, but credit card should be the first thing on your list.
In the case of a Personal Loan, you’re paying a fixed amount every month that consists of the interest and the principal amount. It’s best to use the low-interest rate Personal Loan amount for paying off a high-interest debt like the credit card.
One of the best ways to improve your credit score is to have a healthy mixture of both the types of credits. Institutions look for people who have a good amount available as credit but low owing balance; so never close your credit card account once you’ve paid them.
Personal Loans are harder to acquire than credit cards and that’s why they have more value. With a Personal Loan, your credit score is sure to soar high.