How to Improve Credit Score through Personal Loan & Credit Card?

One of the most crucial eligibility parameters that lenders consider before approving loan applications is the CIBIL score. This three-digit numerical code represents your credit worthiness, and depicts whether you are a risky-free borrower or not.

In this regard, a CIBIL score of 750 or more can help you obtain personal financing conveniently and at affordable rates. However, if you do not have a healthy CIBIL score, you can boost it through a personal loan or credit card.

To know how does personal loan affect CIBIL score, read through the following sections

There are several benefits of taking a personal loan or a credit card to boost CIBIL score. Find about them below:

• Pay off existing loans

If you have not paid your past dues and have frequently missed instalments, the penal interest, as well as the interest on the credit card or unpaid loan, will be high. Obtaining a personal loan at low interest can help you in such a situation, as it will aid you in paying off your debts and eventually increasing your CIBIL score.

• Debt consolidation

Apart from the above-mentioned point, you can consolidate your debts with a single personal loan. This will lower the interest you pay on your loans and ensure that your repayment is hassle-free via EMIs of the personal loan.

If you are wondering “how does personal loan affect credit score?” then you must know that, in the short-term a personal loan can pull your credit score down. However, if you make regular EMI repayments, you do not need to worry, as this will eventually increase your score.

Note that defaulting on your loan repayment can significantly hamper your CIBIL score.

Your answer to ‘does personal loan affect CIBIL score’ lies in the way you utilise your credit. Obtaining a personal loan can help you in the following ways:

• Improves your payment history

Through a personal loan, you can repay your existing debts with ease without worrying about loan defaulting. This improves your credit history.

• Increases credit mix

When you maintain a good credit mix between credit cards and secured and unsecured financing, you boost your CIBIL score. You can leverage a personal loan to help you attain this objective. 

Note the following points to boost your CIBIL score while repaying your personal financing:

• Do not make multiple personal loan applications

Multiple personal loan applications depict that you are credit hungry and might not repay the loan on time. This, in turn, puts a negative impact and can harm your credit score.

• Lower your credit utilisation

Credit utilisation refers to the amount you owe with respect to the spending limit on your credit card. Most individuals have a mix of revolving credit lines with high interest rates. You can reduce your credit utilisation through a personal loan.

• Timely Payments

One of the most crucial tips to increase your credit score is to make timely payments of your due. Consider repaying your existing dues on time to boost your credit score.

Apart from knowing how personal loan affects credit score, you must know that you can boost your score through the wise usage of credit card as well. Know more in the below pointers:

1. Increasing use of credit card

In recent years, more and more individuals are considering obtaining a credit card, owing to its ease of usage and ready availability of credit. As per March 2022 data by the Reserve Bank of India, the average spend by credit card users in India was around Rs. 14,500 per month. 

2. Pay bills on time

Similar to a personal loan, paying your credit card bills on time will help you steer clear of heavy interest rates. Additionally, it will increase your credit score gradually.

3. Don’t settle at a go

Upon failing to repay your loan, you may consider approaching your bank to settle your deal. However, this can have a negative impact on your CIBIL score, as it shows that you have not actually paid off your credit. To avoid this, you need to talk with your card issuers and change the “settle” status to “closed”.

To know does personal loan affect CIBIL score, you must note down a few personal loan habits that can impact your credit score negatively:

1. Hard inquiries

When a lender runs an inquiry on your  CIBIL score, it is called a hard inquiry. Subsequent hard inquiries can have a negative impact on your credit score, though slightly.

2. Taking too many debts at the same time

Applying or obtaining too many debts at the same time depicts your credit hungry behaviour and shows that you might not repay your debts on time. This negatively hampers your CIBIL score.

Indeed, paying off your loan answers all your doubts regarding “does personal loan affect CIBIL score.” Note that when you pay your loan on time, you boost your repayment history. This boosts your credit score.