If one is in need of funds for miscellaneous reasons like a luxury holiday, funding education if education loan is not available and so on then personal loans can to the rescue. The applicant can get these loans without much hassle and documentation; if you already have a relationship with the lender then the process becomes much simpler. Often the ease with which one can get a personal loan may tempt individuals to get one even when not necessary; so is getting a personal to try and boost your credit score a good idea. We explore this here.
How Are Credit Scores Calculated?
Credit scores are calculated based on five aspects; they are repayment history, credit utilization, loan tenure, credit mix and enquiries. Thus all payment records for last three years for all loans and credit cards, how much of your credit limit you use, combination of secured and unsecured loans, depth of credit history and hard enquiries made for your credit score contribute to score calculation. Repayment history and credit utilization are the biggest contributors to the credit rating while other three factors though important, make a relatively smaller contribution to the final score.
How Can Personal Score Help In Improving Credit Score?
In case you have a low score and you want to improve it there are various ways to do it, so is a personal an effective way to improve credit score or not? The discussion below focuses on that:
They can be used for debt consolidation: These loans can help you in debt consolidation especially if you have a huge burden of credit card debt. Credit card debt is one of the most expensive debts, not paying your dues on time leads to levying of penalties and interest on overdue amount ranging from 24% to 40%. If this is not paid by the next billing cycle then it will keep mounting and the debt will keep burgeoning. If there are multiple cards where the user is defaulting then he/she will end up paying huge amounts as interest and penalty. In such a scenario a personal loan can help you, this loan will help you consolidate all your credit card debts and they are less expensive as compared to credit card debt. Using a personal loan at lower interest can help you repay the dues of credit card which are at higher rates; this will help in improving the score over time. Managing a single EMI is better than managing multiple credit card payments and the credit card dues will stop reflecting as overdue in your credit report. This will help in reducing the overdue burden and the score will improve.
Another way personal loans can help is using these loan to pay a costly loan. This may not impact the credit score directly but will help in reducing the overall interest burden and will help you make timely payments.
A Word of Caution Though:
If you are planning to get a personal loan for trying to better your credit rating, it is important to keep a few things in mind. Make sure you do not apply for multiple loans, apply at only one place after making sure you comply with all the formalities. Do not apply for an amount more that you require just because you are eligible for it or because it is easy to get one. The amount should be sufficient to serve the purpose for which it is taken.
Do check the interest rate at which the loan is available, an expensive loan will defeat the purpose of getting it. If you score is low then getting a personal loan for low CIBIL score could be difficult. Also make sure that you pay the dues on time and you do not pre pay the loan as missing payments or prepaying a loan can harm the score.
Thus a personal loan can help you in improving your score if you apply and use it with caution.