Before granting a loan to a customer, the lending bank or financial institution carries out various checks to ensure that customer will pay the loan back along with the due interest. One of the major factors that often affect the bank’s decision to lend money to an individual is his/her credit score.
If you have a good
credit score, you get loans rather easily. In fact, housing financial
accounting companies offer better
interest rates to those with higher credit scores. If you want, you can boost
your credit score in a number of ways. But did you know that a personal loan
can also help you improve your credit score?
Well, a majority
of people know that the credit score depends on the individual's credit
history, amount of debts, current loans, repayment history, and more. However,
only a few people know how to use a personal loan to improve their credit
scores.
Here are some
effective ways to use a personal loan to improve your credit score:
1.
Using
a credit-builder loan:
A credit-builder
loan is a type of loan where you make fixed payments month after month toward
the amount of the loan. Once you make the complete payment with interest, you
finally receive your funding. It may feel a bit counter-intuitive since you do
not get access to the borrowed money until after you have paid it off, but that
is the whole point of this loan.
At the end of your
payments towards the loan amount, you will have credit built through your
monthly payments. Also, you will gain access to a savings account with the
total amount of the loan in it. In the end, you will have the money without any
strings attached, completely paid off. How good is that?
2.
Debt
consolidation:
One of the more
strategic ways to use personal loans is to consolidate debt. Suppose you have
four credit cards, each with an outstanding balance on them. You are making
four different payments every month at four different interest rates. Now, you
can take a personal loan and use the borrowed money to pay off all four credit
cards, and then pay the loan back with one payment per month.
What is more
interesting about the strategy is that you save some money in the process. This
is because personal loans often have a lower interest rate than credit cards.
In the process of debt consolidation, you will boost your credit score by
making the due payments and resetting the balance on your Assignment help
company cards.
3.
Building
a good payment history:
As mentioned
earlier in this blog, your payment history is one of the many things that affect
your credit score. So, you need to make sure that your personal loan payments
on time to build a good payment history. It is wiser to take a personal loan
when you are confident about making the payments on time. Otherwise, it can
reflect poorly on your credit score.
Always remember to
make the payments in full every month. If your bank has the option to set up
automated payments, utilise that option for timely payment toward the personal
loan amount. If you don't have such an option, you can set reminders for
payment and be disciplined with the payment every month. If you can manage to
make timely payments, it can help boost your credit ratings.
4.
Lower
your credit utilisation:
The credit utilisation
ratio is another factor that impacts your credit score. Credit utilisation
refers to how much you owe with respect to the spending limit on your credit
card(s). Most people have a mix of revolving lines of credit, including
high-interest credit cards. Adding a personal loan to the lot can help reduce
the credit utilisation score and improve your credit score significantly.
As already
mentioned, you can consolidate debt by taking personal loans. If your credit
cards remain open after transferring the balance to a personal loan, your
credit utilisation ratio goes down. So, you keep the credit cards open and
don’t run up a balance on them again. It will help you improve your score over
time.
read: How to Get a Second Mortgage Loan in India?
5.
Enhance
your credit mix:
Credit mix is the
diversification of the various loans or lines of credits that the individual is
currently paying off. And as you may have guessed already, this is another
factor that determines the credit score of individuals. Adding personal loans
to the mix can have a positive impact on the credit score as it indicates that
the individual has experience in managing different types of credit.
Credit mix count
for 10% of an individual’s credit score. If you only have one type of credit in
your profile, it shouldn't have a huge impact on the credit score. It is
comparatively difficult to reach the "800 club" without a variety of
credits. So, if you did not have a personal loan before, adding a personal loan
to the mix can help your boost the credit mix.
You now must have
a good amount of knowledge about how to improve your credit score with a personal
loan. However, a personal loan can also affect your credit score negatively if
you are not careful. So, you also need to be aware of the risks associated with
the use of personal loans to build credit. As long as you use these
aforementioned tips, you can improve your credit score easily.