How Can A Personal Loan Improve Your Credit Score?

by Guru Sone Financial Services

One should use a personal loan very responsibly. If you miss repaying your loan on time, then your credit score will see an adverse effect. Your credit score indicates how well you are managing your finances.

If you have a good credit score, you can get an unsecured personal loan easily. Unsecured loans are the ones which do not require any collateral. You can get a loan without pledging your assets as security.

Credit score

A credit score is a number that indicates your current financial position. If you are good with your financial matters, then you will have a high credit score without a doubt. Just make sure that you are making timely payments.

If you have a low credit score, you will not be approved for a loan. But some lenders have relaxed criteria and you can still avail a loan with a low credit score. The usual credit score ranges from 300 to 850.

So, coming to personal loans improving your credit score, like any type of loan, a personal loan can improve your credit score if paid timely. It is a quick way to increase your credit score.

Few ways how a credit score is affected by a personal loan

● Avoiding paying penalties: Timely payments help you to raise your credit score quickly. Avoid paying penalties, and if you do so, your credit score will be decreased. Prompt payments will increase your credit score and you can apply for a new loan based on your credit score. You can also avail a good amount of top-up loan on your existing loan if your credit score is over 750.

● Variety is built into your credit: There are so many factors which are responsible for increasing or decreasing your credit score. They comprise the length of credit history, payment history, credit utilization ratio, credit mix, and credit enquiries. Credit mix accounts for 35% of the overall score. But when it is about personal loan you can have a mix of credit types. A mix of all credit types is seen at a high level of approval by the lender.

● Origination fee: Many lenders charge an origination fee. It cannot be avoided at any cost. It is instantly taken from your loan payment. Origination fee depends on how much money you borrow. Paying late will lead to overdraft of fees and so ensure that you pay total payments every month before the deadline so that your credit score is unaffected.

● The ratio of debt-to-income and loan: Some lenders have their own debt-to-income ratio. So, their proprietary credit scores can make use of it for credit consideration. Never have a mindset that getting a huge amount of loan would diminish your credit score. The damage it does is raise your debt-to-income ratio and so you won't be able to apply for loans anymore as you may get rejected.

So, these are the ways how your credit score is affected by personal loans. So, make sure you follow some tips so that your credit score is not affected, and you have a personal loan to balance your finances in times of need.