Many people are dubious about taking even the best personal loan in India due to a misconception that taking a loan will increase their financial burden and decrease their credibility by reducing their credit score. However, this is a half-truth. Applicants may notice a slight dip in their credit score due to a hard inquiry pulled on their credit report as part of the loan application. However, with consistent EMI repayments and proper loan management, one may recover the dip and even cause the score to increase over time.
Importance of Credit Score in an Individual’s Creditworthiness
The credit score is a crucial parameter based on which lenders determine an applicant’s credibility, eligibility, and interest rate. An applicant with a credit score of 725 and above can get an ample loan amount with the best personal loan interest rates. The credit score is equally significant for all other loan types, including home loans, business loans, etc.
Components of a Credit Score
Before exploring how a personal loan can save a borrower’s credit score, let’s look at its components.
- Repayments of existing loan EMIs and credit card bills
- Debt-to-income ratio
- Diversity of credit types in the portfolio
- Length of credit history
- Credit utilisation rate
How does a Personal Loan Save Credit Score?
An applicant’s credit score is crucial in improving their eligibility and getting them the best personal loan interest rate. Besides that, a personal loan can even help them save and improve their credit score. That is why many individuals take a personal loan even when they have money to cover their expenses. Let us see how it works.
An individual’s repayment history for existing loan EMIs and credit card bills forms a significant part of their credit rating. By paying personal loan EMIs consistently, one may improve their score over time.
Diversity in Credit Portfolio:
Personal loans are medium-term unsecured loans that help diversify an applicant’s credit portfolio, thereby improving their credit score.
Reduced Dependence on Credit Cards:
People may cover their urgent or planned expenses, like weddings, home renovation, medical emergencies, etc., using their credit cards. However, it increases their credit utilization rate and drops their credit score. On the other hand, the best personal loan provides them with the required funds at lower interest rates. It reduces their dependence on credit cards, thereby decreasing their credit utilization rate.
Tips to Save the Credit Score Using a Personal Loan
Here are a few tips to save the credit score from dropping and improve it with a personal loan:
- Stay consistent with the EMI repayments
- Choose a longer loan term to keep EMIs manageable within budget
- Don’t apply for multiple loans at a time
- Calculate expenses and borrow a minimum
- Do not pre-pay the loan
So, whether an individual requires funds for a medical emergency, home repair, spontaneous vacation, education, buying a gadget, or a wedding, choosing a personal loan in India is the best option for you. Many banks or NBFCS company provides the funds necessary to cover their financial needs and helps save and build their credit score.