How to Improve your Credit Score with Personal Loan - Explained! | Personal Loan Stories

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How to Improve your Credit Score with Personal Loan - Explained

13 AUGUST, 2021

Personal loans are the best option to reach your short-term financial goals or financial emergencies. Personal loans are considered unsecured loans. That means they don't need any collateral and the application process is also easy.

To get eligible for personal loans, an individual should meet certain requirements. When you are applying for a personal loan, make sure you have a good credit score to get a cheaper interest rate and instant approval. A credit score of 750 or above will establish you as a responsible borrower.

How to Improve Credit Score with Personal Loans – Explained!

There are multiple ways through which an individual can improve their credit score. The credit score, which is calculated out of 900, is based on five major variables.

New debt
Credit history
Total debt owed
Types of loans taken
Length of the credit period

There are many personal loan eligibility calculators online. Use them and know your personal loan eligibility.

Taking Advantage of a Personal Loan to Improve Your Credit Score

Clearing old debts: Taking a personal loan is the most convenient approach to pay off your previous debts. By doing this, you can begin a new debt repayment plan with new terms. It also helps in improving your payment history, which tends to raise your credit score.
Paying debts on time: When you request a loan, you agree to repay it in installments determined by the lending institution as per your repayment capacity. Because there is no financial strain, you will be able to make the payments on time, which will add to your credit history and increase your credit score.
Clearing existing high-interest debts: The penalty interest, as well as the interest on the credit debt or unpaid loan, will be significantly high if you haven't paid your prior loan dues and have repeatedly missed payments. Taking a low-interest personal loan to pay off your obligations will relieve your financial load and enhance your credit score.
Minimizing credit utilization: The amount you owe in relation to the credit card spending limit is referred to as credit usage. Most people hold a variety of credit cards, including high-interest credit cards. Adding a personal loan to the mix might help lower your credit use and improve your credit score.
Credit mix: Credit mix is used in the credit score system. The diversification of the many sorts of loans or lines of credit you are now paying off is referred to as a credit mix. A personal loan might help you improve your credit score because it shows that you've dealt with various forms of loans before.
Inquiring about credit cards: If a person inquires about other credit cards, his credit score may be impacted. As a result, one should avoid this and instead do research through internet platforms rather than contacting credit card providers, which will help him improve his CIBIL score.
Paying complete Personal Loan EMI on time: By just paying the minimum amount required, many people accumulate a large debt. However, you should be aware that by doing so, the remainder of the debt will continue to accrue interest, further lowering your credit score. Making regular on-time payments, on the other hand, might help you enhance your credit score over 1-2 years (depending on the tenure of the loan).

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Therefore, if you were looking to improve your credit score, a personal loan might be a good bet for you.

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.