A Personal loan is ideal in case of any financial emergency as it does not require any form of collateral. Also, it is quite easy to go through the formalities of availing a personal loan. However, what most people overlook is the fact that personal loans can also play a great role in improving your credit score if managed properly.
Why a Personal Loan is a better choice?
Few individuals opt to apply for credit cards to improve their credit scores. They make purchases on their credit card and pay off the bill immediately for building credit. There is a good chance that you can land in debt if you go overboard on your credit card spends.
In comparison, when you avail a personal loan and make timely payments consistently, it demonstrates your reliability and invariably improves your credit score to a much larger extent than credit cards. Besides, availing a personal loan requires lesser work when compared to getting a credit card for building credit.
You can even choose to set up automatic payment towards your personal loan from your bank account so that you do not miss any payments. You can also get the personal loan approved at a lower interest rate if you have a co-signer with a good credit history. A good credit score lies between 700 and 749. Having a good credit score opens up a good number of options for an individual in the future when going for home loans.
With a good credit score, you can easily apply for better credit cards which offer a greater number of benefits. You can even get the card at a lower interest rate.
How do you benefit from a Personal Loan?
- To pay off your old debts: Availing a personal loan is one of the easiest ways to settle any old debts. In this way, you can clear your old debts and restart paying off the loan amount with lower interest. This also helps improve your credit payment history, which in turn, improves your credit score.
- To repay on time: You have to repay the loan amount in terms of affordable instalments decided by the financial lender based on your repayment capability. Monthly instalments will reduce your financial burden. You can easily repay the loan amount on time without missing any payment, which improves your credit score and credit history.
4 Ways to Increase Your Credit Score with a Personal Loan
One can follow the below-mentioned steps to increase their credit score with the help of a personal loan:
- Avoid applying for multiple loans: You must never represent yourself as a credit hungry person before financial lenders. Besides, whenever you apply for a loan, a hard inquiry is carried out on your credit report and the same impacts your credit score. Several hard inquiries on a credit report are considered bad for a borrower.
- Choose the loan amount quite carefully:It is very essential that you apply for a personal loan amount that you actually need and afford. As you are opting for a personal loan to improve your credit score, the loan amount availed becomes a very big factor. Always avail a loan amount that you can repay without too much of a burden.
- Make regular payments:Availing a personal loan and not repaying the same on time does not make sense, especially if you are taking out the loan to improve your credit score. As personal loans are unsecured loans, they can easily affect your credit score the most. Therefore, it is better if you repay the Loan EMI amount on a timely basis without fail.
- Avoid pre-paying your loan: If your objective of availing a personal loan is to improve your credit history, then it is best advised that you do not repay the loan completely before it matures. Longer credit history is usually considered better. Your credit score will definitely improve if you make regular payments over a longer tenure period.