Ways in which your personal loan affects your credit score

by | Jun 22, 2019 | 0 comments

By Author: Naveej C R

A personal loan has a lot to do with your credit score. It can impact your rating in both positive and negative ways depending on how you use it. Handle your loan well, and it will improve your score over time. But handle it badly and it can destroy your score.

We’re going to take a look at how your credit score is impacted based on how you handle your loan. The following factors play a role in impacting your score:

1. Submitting a loan application
2. Regularly paying off the loan
3. Not paying an EMI by the due date
4. Consolidating your debts

Now let’s take a look at these factors a little more in detail to understand them better.

1. Submitting a loan application

Shopping and looking around for a loan will not impact your score in any way. These are called soft checks. But when you apply for a loan or submit a loan application to a lender, the lender runs a credit check on your profile. This is a hard check which has an impact on your score.

Such inquiries contribute to a smaller percentage of your score, but they still matter. If you apply for multiple loans at the same time or within a short time, it can hurt your credit rating. This is because multiple applications in a short period of time indicate that you depend on credit more than your own income to meet your expenses.

The more the number of credit checks on your profile within a year or two the more your credit gets hurt. This is why it is always advisable to compare various loan options before applying for one. Don’t apply for a loan just to see if you are eligible for it. Use eligibility calculators available online to check before you apply.

2. Regularly paying off the loan

Your debt repayment history is one of the biggest factors that contribute to your credit score calculation. Every time you pay your monthly dues on the due date, it goes towards improving your score.

So, if you’re looking at building a strong credit rating, you need to ensure that you pay every EMI on time, without fail.

3. Not paying an EMI by the due date

Paying your EMIs on time help to improve your score. The opposite of this happens when you don’t repay your loan on time. Even a single missed payment can have a huge impact. Keep failing to pay your EMIs on time, and you just might end up seeing your score in the red.

Your main objective should be to make sure that you don’t miss paying even one EMI on time. Create a monthly budget for all your expenses and give the most importance to your debt repayments. This will help you manage your other expenses and stay within your budget.

4. Consolidating your debts

Consolidating your debts into a single loan can actually help improve your score. Take, for example, credit card bills. If you have several bills that haven’t been paid yet, take a personal loan and pay them all off in one shot.

This will help you save a lot of money that you would otherwise pay as credit card interest. The interest rates on these loans are much lower than those of credit cards. These loans have rates of around 13% p.a. while credit cards can charge you up to 40% p.a. or even more on unpaid bill balances.

When you pay off credit card debts, it reduces your credit utilisation. The lower the amount of credit you use, the better it is for your score. Moreover, a personal loan will add to your credit mix. This is good for your overall score.

What you need to keep in mind

Now that you know how taking a loan can impact your credit rating, let’s summarise them. Remember to keep the following points in mind:

Never apply for a loan without checking your eligibility.

If you want to check your eligibility, use a third-party website that offers you this facility.

Remember to always pay your loan instalments on time.

Defaulting on even a single repayment can hurt your score badly.

If you have existing outstanding credit card debts, use a loan to pay them off. You can save on interest costs and also add to your credit mix.

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